A company’s management and board of directors have a fiduciary duty to maximize shareholders’ wealth and protect their capital.
With the price of Bitcoin spiking recently to new highs, Bitcoin fever is spreading fast. It’s no surprise that the below-average trader who always jumps on the latest craze is buying Bitcoin now.
But it is shocking that CEOs of publicly traded companies are purchasing billions of dollars’ worth of Bitcoin with their shareholders’ capital.
MicroStrategy (Nasdaq: MSTR) is all-in on Bitcoin.
Last year, it said it planned to use Bitcoin as its primary treasury asset.
That is simply irresponsible.
Bitcoin is billed as an alternative currency. But the reality is that no one uses Bitcoin for transactions. Perhaps someday in the future that will happen, but not now.
At the end of 2020, MicroStrategy had $60 million in cash versus $4.5 billion in Bitcoin today. That is insane.
There’s nothing wrong with diversifying outside of the U.S. dollar, but holding 99% of your “cash” in Bitcoin is hardly diversification.
Because the bet has worked out so far with Bitcoin at new highs, no one is complaining. But would investors feel the same way if the company were putting all of its money into gold, Turkish lira or millions of pounds of marijuana?
At least you could turn the marijuana into cash…
If MicroStrategy needed to unlock the value of its Bitcoin holdings and sold, it would drive the price sharply lower.
“It’s a Dessert Topping and a Floor Wax”
MicroStrategy expanded its corporate mission to include acquiring and holding Bitcoin.
In other words, it went from being a business intelligence company that provides analytics to companies – you know, a real business – to a business intelligence company that also gambles on Bitcoin as part of its corporate strategy.
The resources that are being diverted to gaming Bitcoin should instead be used to grow its business and serve customers.
How all-in is MicroStrategy on Bitcoin?
It recently offered $600 million 0% coupon convertible debt to buy more Bitcoin. It increased the offering to $1.05 billion to meet demand.
Think about this for a minute. Investors gobbled up a bond that pays zero interest with the hopes that it can be converted to stock for a profit. Convertible bonds are common, but investors typically get paid interest while waiting to see whether the convertible feature will be profitable.
Buyers of the bonds were made fully aware that the sole purpose of the offering was to buy more Bitcoin. Not for general corporate purposes and not to pay down debt, but to speculate on more Bitcoin…
This is not something that happens at bottoms.
Some may ask, what about Tesla (Nasdaq: TSLA) and its recent $1.5 billion purchase of Bitcoin?
Tesla has $19.4 billion in cash. If it wants to diversify a small portion of its cash holding into Bitcoin, I won’t protest too much.
More importantly, Tesla hasn’t changed its business model. It still focuses on producing cars and solar walls. While it may hold Bitcoin, it’s not in the business of Bitcoin.
I understand the argument about the U.S. dollar being a fiat currency and about how the enormous government debt is going to erode the value of the dollar over time.
Again, if a company wants to protect shareholders from a dollar devaluation by diversifying its holdings into other currencies, I’m fine with that.
But to hold so much cash in an extremely speculative asset and to change the business model to gamble on the asset is a complete breach of fiduciary duty.
Should Bitcoin fall in price, shareholders will be hurt significantly. And I suspect executives and directors will be hauled into court.
I can’t recall a more irresponsible use of shareholders’ capital in my 25 years in the market – and that includes some boneheaded acquisitions and spending during the dot-com bubble.
MicroStrategy is the best short opportunity I’ve seen in years.
It’s tough to borrow, and puts are expensive. And MicroStrategy may ultimately go higher if Bitcoin continues to rise. But I suspect we’ll see this stock back at $300 and maybe lower.
If you want to own Bitcoin, buy Bitcoin. Don’t buy the stock of a company that has no respect for shareholders’ capital.