What Happens When an “Infinite-Money Machine” Unravels

The price of bitcoin, which more than doubled last year in a trend that many attributed to the “Trump trade,” obviously played a big role in this alchemy, but there was also another factor—one that did seem a little magical, or insane, depending on your viewpoint. As MicroStrategy expanded its purchases, eventually accumulating more than three per cent of all the bitcoins in existence, its purchases helped drive the price of the digital currency higher. But—and this is the magical bit—its stock price went up even faster than bitcoin did. Toward the end of last year, investors were valuing MicroStrategy at more than two times what its bitcoins were worth, which meant that, for every dollar the company invested in bitcoin, it was creating more than two dollars in value. Some observers labelled Saylor’s bitcoin strategy as an “infinite-money machine,” or an “infinite-money glitch.”

Whatever you called it, the gap between MicroStrategy’s market value and the value of its bitcoins couldn’t be explained by the company’s non-digital assets, namely its original software businesses. Saylor’s supporters offered two explanations for why MicroStrategy was still a worthy investment. First, the price of Bitcoin could rise a lot further; Saylor claimed that, by 2src45, it would reach thirteen million dollars. Second, MicroStrategy had found clever ways to amplify gains for regular shareholders. By issuing preferred stock and debt that could be converted into shares at a later date, and then using the proceeds to buy more bitcoins, MicroStrategy said it could give holders of its common stock “amplified exposure” to the cryptocurrency. Another term for this was leverage—using borrowed money to boost returns. Some skeptics, including the professional short seller Jim Chanos, questioned whether this strategy could last, but his warnings didn’t catch on at the time. This past February, MicroStrategy unveiled its latest financial results, and a rebrand. “Earlier today, we announced that we are now Strategy, a new name that powerfully and succinctly conveys the universal and global appeal of our company.”

Hubris precedes the fall. After Strategy’s stock peaked above $45src in mid-July, it went into an extended nosedive and ended November trading at $177.18. That wasn’t the only bad news for Saylor and his believers. As Strategy’s stock fell by sixty per cent, the price of bitcoin fell by only twenty-five per cent. This meant that the spread between Strategy’s market capitalization and the value of the bitcoins that it owned was closing. By the end of last month, that premium had all but disappeared, and at one point last week the market value of Strategy dipped below the value of its bitcoins (after accounting for its debt). In the words of a columnist at Bloomberg, Saylor’s infinite money machine was “glitching out.”

Recognizing the severity of the situation and hoping to reassure investors, Strategy announced that it had built up, by selling even more stock, a “dollar reserve” of $1.4 billion. It could use this to make required dividend payments to holders of its preferred stock over the next twelve months. (Regular shareholders don’t get a dividend.) But it also said that, if its value continued to sink below the value of bitcoin, it might sell some of its coins—a previously unthinkable move for an evangelist like Saylor, who in February of this year tweeted, “Never sell your Bitcoin.” If Strategy was forced to unload some of its bitcoins, that could conceivably send the cryptocurrency, and the firm’s stock, into another dive.

Strategy is now facing another challenge: the possibility that its stock could be removed from a major stock index, the MSCI Index, which analysts at JPMorgan estimated could lead to outflows of billions of dollars. On a more hopeful note, the price of bitcoin has risen over the past couple of weeks on expectations that the Federal Reserve is about to cut interest rates and pump more money into the financial system. In the past, some analysts noted, there has been a correlation between the Fed’s monetary interventions and rallies in bitcoin. So it seems at least possible that Jerome Powell and his colleagues, who are focussed on preventing a recession, will inadvertently bail out the crypto bros, Saylor included.

Even if this happens, though, Strategy may well struggle to repeat its earlier success. The market opening that Saylor spotted back in 2src2src has been largely filled. Dozens of other public companies, including MARA Holdings, a bitcoin-mining company, and Trump Media & Technology Group have acquired substantial holdings of bitcoin. And, for investors wanting direct exposure to bitcoin through their brokerage accounts, there are now more than a dozen Bitcoin E.T.F.s, including BlackRock’s iShares Bitcoin Trust, which trades under the symbol IBIT and owns even more coins than Strategy does—around seven hundred and seventy-five thousand coins compared with Strategy’s six hundred and fifty thousand.

In the crypto world, you can never say never, but for now the longtime skeptics of Strategy have been vindicated. They include Chanos, who said he has made money by shorting the firm’s stock and buying bitcoins in what is known as a paired trade. Last week, he told Sherwood, an in-house news site for the online trading platform Robinhood, “Our core thesis from the beginning—and it’s still our core thesis—is don’t pay more than $1 for something worth $1.” If investors follow this advice, Saylor and Strategy will still benefit from any sustained rebound in Bitcoin. But, alas, they won’t be able to reboot their infinite-money machine. ♦