Michael Saylor explains his framework for why every company needs a bitcoin treasury strategy in an era of 15-20% annual money supply expansion. He argues that asset inflation has tilted the playing field against cash-holding operating companies, and walks through why converting corporate cash flows into bitcoin is the only rational response — using MicroStrategy as the proof of concept.
Speakers: Michael Saylor (guest, MicroStrategy CEO), Sam Parr (host), Shaan Puri (host)
The Melting Ice Cube Analogy [00:00:00]
Sam: I like the analogy — the awareness that you have this giant bowl of ice cream that’s melting. That’s your cash pile, melting. And the heat is basically the money printer that’s causing asset inflation. You have a 500 million dollar ice cube that’s melting 20 percent a year, and it will be gone. So you needed to do something with it — you didn’t want it to all melt away.
Now a couple quick questions — sort of rapid fire. In 20 years from now, what do you think has generated more value, more income to MicroStrategy: the operating income of the business, or the investment income of the bitcoin it holds?
Michael Saylor: The investment income, for sure.
March 2020 and the Tilted Playing Field [00:01:00]
Sam: Okay. And to be clear — what happened in March of 2020 is when the cost of capital goes to 25%. That means every investor generated 25% more doing nothing, right? And every main street company that worked 25% harder got nothing.
You literally tilt the playing field so that if you own assets you’re having the best year in 30 years, and if you don’t own assets it’s impossible to have a good year.
Michael Saylor: Right.
Sam: So the second question — as you acquire more and more bitcoin, is MicroStrategy basically just positioning the company as a bitcoin ETF? Like, buy this — it’s a bitcoin buying vehicle?
MicroStrategy Is Not an ETF [00:02:00]
Michael Saylor: It’s not a bitcoin ETF. Everybody’s sloppy with those words.
An ETF is a company that invests in securities and tries to keep its assets under management equal to the amount of shares of ETF it sold. It’s a financial company. An ETP is a similar type of company that invests in commodities. If you create a bitcoin entity that equalizes assets under management to the shares you sell, you’ve created a bitcoin ETP.
We’re neither of those things. We’re not a finance company. We’re not an ETF. We’re not an ETP. We’re not buying or selling bitcoin to equalize assets under management. We’re an operating company that owns property. Bitcoin is property. In that way you should think of it as a company that bought a million acres of land in Texas, or bought a million gallons of — fill in the blank. You can buy any kind of property and hold it on your balance sheet as a company. That’s what we are.
Forecasting the Cost of Capital [00:03:30]
Sam: You’re talking about the cost of capital being 25% since March. But the stock market goes up and down. In years where the market dips, the average or geometric mean over time is something like seven or eight percent. Some would argue: yes, assets inflated by that much this year, but that doesn’t mean next year it’s going to remain at 25%. So you have to make a prediction. Are you forecasting 25%, 15%, 10%, 8%? And does the decision change at a certain number?
Michael Saylor: For the decade from 2010 to 2020 it was generally about 8%. Pretty consistent. And the single biggest driver of cost of capital is the rate at which the broad money supply expands.
If you google “M2 money supply Fed” you’ll get a chart, and that chart is not all over the place — it’s very consistent, a 7% slope for a decade. It was very consistent monetary policy. Then that chart goes straight up: 24%.
So if you’re going to make a decision as an investor — and this applies to all 400 trillion dollars worth of investors and every company on earth — they all have the same thing to calculate: you have to estimate the rate at which the money supply will expand each year for the next eight years.
That’s the single most important thing in the world for everyone — 7.8 billion people, 100 million companies, everyone with money on earth, everyone who earns a salary. This is the big idea of the podcast. You have to estimate the rate at which the currency is going to expand.
If you believe the currency is going to continue to expand at 15% a year for the next eight years, you come to one conclusion. If you plug in 10%, it’s a different conclusion. If it’s 25%, it’s a different conclusion.
Saylor’s 15% Base Case [00:06:00]
Michael Saylor: I think 15% for the next eight years is reasonable. If you’re an optimist you might say 10%. But the money supply is expanding because the Federal Reserve and the EU Central Bank are buying a trillion dollars worth of bonds every year each. It’s also expanding because the governments of the EU and the US are running multi-trillion dollar deficits, and because of trillion-dollar-plus stimulus. There’s no reason to think that’s going to change in the next four or eight years.
At the point that the Democrats took control of the Senate and the House, you could have forecasted 12% inflation — that was a split government scenario. But in a non-split government there seems to be remarkable consensus: run deficits, keep interest rates low, continue to stimulate the economy.
So what does that mean? If you plug in 15%, the risk-free return is 15%. You have to generate in excess of 15% on your money every year just to stay ahead of asset inflation.
That means: if your company is not growing cash flows at a 20% rate, it’s not going to hold value as a stock. If your bond is paying less than 15%, you’re destroying value. If your rent yield is less than 15%, your commercial real estate is destroying value. If you’re holding cash, you’re losing 15% of it a year. That’s the negative real yield.
Bitcoin as the Only Apex Asset [00:08:30]
Michael Saylor: Once you embrace asset inflation — asset inflation equals cost of capital equals the rate of money supply expansion — you realize there’s a negative real yield on everything except bitcoin.
The negative real yield on gold is 3%, which is the rate at which we mine or hypothecate it. The negative real yield on sovereign debt is about 12-13%. The negative real yield on corporate debt is 10%. Every company with a growth rate of less than 15% has a negative real yield on it.
Once you do that math, you realize you can’t have a business strategy as a company unless you solve the treasury problem.
So the big idea: to fix any company — sweep all the cash flows into bitcoin. Convert the treasury into bitcoin. Borrow against your future cash flows in dollars and convert that into bitcoin. Finance all your fixed assets in dollars and convert that into bitcoin. Issue equity at the highest valuation you can in dollars and invest in bitcoin.
And you might say, why bitcoin? Because bitcoin is the apex property. It’s the most scarce monetary asset in the universe. You can’t make any more of it. It’s encrypted money. That means it’s least likely to be impaired by a property tax, an execution issue, money printing, dilution, counterparty risk, or corruption.
We have engineered a superior asset — a thermodynamically sound, technically superior asset. It’s placed on a global digital monetary network, which is an open protocol. The combination of the apex asset on the open monetary system makes it the most disruptive technology in the world.
When Did MicroStrategy Solve Its Problem? [00:11:00]
Sam: When you were first starting MicroStrategy, you were in the weeds — thinking, “I have to make a product that solves a problem and make money off it.” Now you’ve gone way up the hierarchy, and you can do whatever you want. At what point did you notice that shift? Because what you’re talking about now is pretty important.
Michael Saylor: We solved our problem when we embraced bitcoin.
I could say to you, “Oh yeah, when I had 500 million in cash in the bank.” And we were focused. But the problem with that is: if you have a bunch of cash generating zero interest, and the cost of capital goes to 25%, then all the public company investors forsake the company. And if the stock market forsakes the company, the mainstream media forsakes the company. The employees become dejected. Eventually Facebook, Amazon, Apple, or Google will steal every one of your employees if you can’t drive the stock up.
Nobody wants to invest in a company that makes good money growing at 5% a year. It seems brutal to say that — but it wouldn’t be true if the cost of capital was zero. If we had a sound money policy in this country, you could hold your head up high and say, “I run this great restaurant, we made a lot of money last year, we’re going to make a lot of money this year, and our plan is to keep doing what we’ve been doing.” And everybody would pat you on the back. That’s honorable.
But if I’m going to devalue cash by 25% a year, at some point you’re driven into this cycle where you either do a big acquisition to keep revenues growing, take extreme risk with dilutive acquisitions, or borrow billions of dollars to buy the stock back and leverage up cash flow per share. If you don’t do any of those things, investors dump the stock. And when they dump the stock, employees start thinking, “Why don’t I go work somewhere cool?” And you’re going to get your engineers stripped away by Facebook or Amazon.
Fixing the Balance Sheet Fixed Everything [00:14:00]
Michael Saylor: The truth is, when we fixed the balance sheet, we fixed the stock.
The company now has more than five billion dollars in assets. If the cost of capital stays at, say, 20% — if we print 20% more money next year — I can reasonably expect to generate a billion dollars in investment income. That’s a 20% increase in bitcoin. But the truth is I can reasonably expect better than that.
Compare that to the alternative: if the cost of capital is 10%, I can reasonably expect 500 million in investment income. Meanwhile, 2,000 people doing 100,000 things perfectly for the entire year — competing against Microsoft, which has more money than God — might generate 75 million a year.
So the company’s future became secure when we converted the balance sheet to bitcoin. Now we don’t have to struggle.
Let me say it a different way: I don’t think any company can be successful without a financial strategy in 2021. I wouldn’t have said that three or four years ago. If you have a sound money macroeconomic environment — money supply expanding at 2-3% a year — you can go out and make things, create things, market things, sell things, service things, generate cash. That makes sense.
But if the money supply is expanding at 20% a year, you need to own assets. What’s happening is: no one is going to invest in any project that doesn’t generate more than a 20% hurdle rate. Who can consistently generate 20% returns risk-free? You have to be a monopoly. You have to have a digital monopoly or some kind of monopoly. It becomes exponentially harder to grow, and companies get squeezed out of the ecosystem, decapitalized and rendered insolvent by monetary policy.
The Endowment Analogy [00:17:00]
Michael Saylor: My stock was 120 a share. What is it right now?
Sam: 768.
Michael Saylor: If I get my stock up, I can make my shareholders happy. I can change the narrative. I can recruit. I can retain talent. I can inspire confidence in my customers. I can drive momentum, and then we can do what we want to do.
It’s similar to a university and its endowment. A university with no endowment, versus one with a billion dollar endowment, versus one with a 100 billion dollar endowment. If you’re a professor, which university do you want to work for? If you’re a student, where do you want to go? Do you have a shiny building coming?
At the end of the day, money is a measure of energy. If you have monetary assets, you have energy. And if you have high energy, you can pursue your vision with integrity.
Saylor’s Day-to-Day Role [00:18:30]
Sam: What percentage of your time now are you spending on the investment income side versus the day-to-day — the business as usual, making business intelligence products?
Michael Saylor: I’m the CEO, but we have a President — Fong Lee — and he has day-to-day operational responsibility for sales, marketing, and technology development.
I’m the Chairman and CEO. I oversee company strategy, financial strategy, long-term direction, and technology strategy. But I’m not in the weeds of day-to-day operations. That’s left to the operating executive team.