MicroStrategy CFO Phong Le discusses the reasons for holding bitcoin and his own thoughts on bitcoin’s relationship with accounting, operational reporting, the board of directors and investors.
Original Article Title: “The Man Behind Michael Saylor, MicroStrategy CFO Phong Le Talks Bitcoin Investment Strategy
Interviewee: Phong Le, CFO of MicroStrategy
Compiled by Chen Zou
Cryptocurrencies have become one of the most widespread uses of blockchain distributed ledger technology, and last August, business intelligence software maker MicroStrategy began its foray into cryptocurrencies when its corporate finance division bought $250 million in bitcoin as a major reserve asset. President and CFO Phong Le will talk in an interview about the advantages and logic behind his bitcoin holdings, as well as his own thoughts on bitcoin’s relationship with his accounting business, operational reporting, board of directors and investors.
Q: In a low interest rate environment, treasurers are always looking for more efficient cash utilization. Can you talk about MicroStrategy’s rationale for buying bitcoin?
Phong Le (later Le): Due to the epidemic, many governments are boosting their money supply through quantitative easing. This means that things in the form of fiat currency, such as the U.S. dollar, are losing value at a rate of 15 to 20 percent per year. The traditional way to invest is in treasury bills, but it is not wise to leave money entirely in fiat currency because it can be “devalued” at any moment at the government’s pleasure. Therefore, it is wise to look for a diversified approach to investing.
The conventional wisdom is that excess cash should be returned to shareholders, and indeed, there is nothing wrong with a company using its profits and balance sheet to increase shareholder income. But I believe the first use of extra cash flow should be to reinvest it in the business, which is best for shareholders, employees and customers alike. Our business is highly profitable and growing, and we have invested an appropriate amount of cash in it. Conversely returning cash to shareholders does not necessarily result in additional benefits to customers or employees, although it will generate a good return to shareholders in the short term.
As we considered where to go with our $550 million in cash flow, we analyzed everything from corporate bonds to stocks and commodities such as silver and gold, and ultimately we concluded 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’ve proven that bitcoin’s volatility is justified in the short term, and as we see more corporate treasurers seeking a positive view on what to do with their excess cash, I think it’s something everyone should consider.
Given our public company structure and a business that has always been able to generate a lot of cash flow, we are able to do something special that most of our shareholders can’t do on their own: that is to use excess cash to buy cryptocurrencies. If we gave the money back to our shareholders, most of whom are large institutions and banks, they wouldn’t be able to use it to buy bitcoin because of the rules and regulations they would need to follow. But we do give shareholders the opportunity to sell their shares back to the company if they don’t agree with our bitcoin acquisition plan. Those who don’t sell have the opportunity to continue to invest in MicroStrategy, and by doing that, we think we can provide more incremental growth for our shareholders.
Q: What makes Bitcoin stand out among if the many cryptocurrency options?
Le: Bitcoin is digital gold, which makes it even better than gold. You can move bitcoin at the speed of light across different regions and different jurisdictions without the frictional losses that come with 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 a market leader and is currently the most adopted by institutions. 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 make a bitcoin investment?
Le: The first thing I would advise anyone considering buying bitcoin is to do a lot of research. There’s a lot of information available through mainstream channels, and of course they include both positive and negative information about Bitcoin, and you should consider both sides. Everyone has some sort of opinion about bitcoin, but they’re not all based on facts. When we planned our discussion with the board, we started by allocating a few hours of video and reading content. With these, 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 get their input and discuss the pros and cons of an institutional acquisition of cryptocurrencies, which is different from a retail investment.
Once we successfully completed the discussions and the board was comfortable with the process, 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 earnings report for the second quarter of last year, we said we had over $500 million in additional cash and 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 such as Bitcoin. We have a public tender offer for $250 million, and if any shareholder does not like the current investment strategy, we can buy back the stock at a 15 % premium. We were even prepared to buy back the entire stock, but in the end, we only got $60 million of stock from shareholders who wanted to sell. Since the remaining shareholders saw the current investment strategy as promising, we added all of the remaining $190 million available to the strategy.
Our reserve policy is very simple. As long as we hold cash flow in excess of our working capital needs – which is about $50 million – they are allocated to bitcoin investments. We use bitcoin as our primary reserve asset, just like many other companies use the US dollar as their primary reserve asset. In our recent 10-K, we clarified that we have two corporate strategies in 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 it’s a very small part of the market. We’re not using it for trading; we’re using it as a store of value.
Q: In terms of accounting and reporting, how does MicroStrategy handle the acquisition and holding of bitcoin?
Le:On the accounting side, if you intend to purchase and hold your own bitcoin, it will be accounted for as an intangible asset. The alternative to holding your own bitcoin is to invest in a fund, in which case the fund accounting allows you to price it at market. We are working with other like-minded institutions and companies to research more appropriate accounting for bitcoin.
Q: Are you implementing bitcoin in any active operational finance functions other than its use as a store of value?
Le: We have an interesting debate about how we use bitcoin in our business. The underlying benefit of bitcoin is quite high. If you expect the value of bitcoin to grow 100 % per year – as it has done over the last 10 years – then any investment in our operations must span 100 % of this yield mark. But even a very conservative estimate – say Bitcoin goes up 20 % per year – still requires a high return on investment for our business. Can we achieve a 20 percent return by investing $100 million back into our business? It’s possible, but we have to think long and hard about it. We plan to build one or two teams to look at how we can turn blockchain – the distributed ledger technology behind Bitcoin, or the analytics around Bitcoin – into a way for us to be profitable. And I can confirm that integrating blockchain into the finance department will not generate a 20 % return, much less a 100 % return, so for now the best way to operate is to continue our bitcoin acquisition strategy. We’re certainly looking at opportunities to apply blockchain to finance, and as long as our customers or employees want it, then we’ll consider doing it.
Q: What risk management process do you use for your bitcoin holdings?
Le:In terms of controls, there is a lot of concern about how bitcoin is held. I’ve been asked if I walk around with the password to our digital wallet around my neck. Obviously, I don’t. We store our digital wallet with investment-grade and industrial-grade custody arrangements, and we treat it just like a bank account. No one can transfer money into or out of our bank account or our escrow account on their own. To do anything with our escrow account, you need to go through a multiple approval process similar to the bank account controls. Therefore, we have a well thought out custodial program and procedures in place.
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