THIS INTERVIEW WITH CEO OF MICROSTRATEGY MICHAEL SAYLOR IS FROM BLOCK JOURNAL'S NOVEMBER ISSUE - DOWNLOAD HERE
This eventful year has been one never before seen year of turbulence and turmoil. With COVID-19 putting a damper on the global economy, quantitative easing going off the rails, and the US elections sure to bring some more volatility. It’s been said in times of bloodshed, the most opportunities present themselves. Michael Saylor, CEO of MicroStrategy certainly seems to agree. In September of this year (2020, Saylor made headlines when he announced that his company MicroStrategy had purchased 38,250 bitcoins. You read that correctly: thirty eight thousand and two hundred and fifty BTC. His very public purchase of over $400 million in BTC with MicroStrategy’s cash reserves may be one of the largest public purchases ever.
Shortly after Saylor’s mega-purchase, Block Journal sat down with the man himself and discussed MicroStrategy’s rise in the enterprise software industry, how his business has adjusted during this global pandemic, cryptocurrencies, and most importantly: how and why he bought over 38,000 BTC. Saylor immediately comes off to us as an intelligent businessman. His words and tone are filled with those of an experienced operator. He thinks mathematically and he thinks big. When he founded MicroStrategy in 1989 with his business partner Sanju Bansal he was a young budding entrepreneur, the world was a different place. The internet was just starting and cryptocurrencies certainly were not a thing.
In 2012, Saylor released his book “The Mobile Wave: How Mobile Intelligence Will Change Everything” which discussed trends in mobile technology and its future impact on industries and in the developing world. The book appeared on the New York Times Best Sellers list, as well as Wall Street Journal’s Bestsellers list in July 2012.
In June 2020, Saylor announced his intentions for MicroStrategy to explore the purchase of alternative assets instead of holding cash reserves. The following month, MicroStrategy announced stock buyback plans as well as the plans to purchase $250 million in bitcoin. The company purchased 21,454 bitcoin. In September, Saylor announced the purchase of an additional $175 million worth of bitcoin.
UPDATE: IN SEPTEMBER 2021 MICROSTRATEGY ADDED ANOTHER 5,050 BITCOIN TO THEIR BALANCE SHEET, BRINGING ITS TOTAL BITOIN HOLDINGS TO 114,042 BITCOIN (~$5 billion)
BJ: Tell us about yourself and how MicroStrategy started?
MS: I went to MIT on an Air Force ROTC Scholarship. I studied Aeronautics and Astronautics, and my specialty was Spaceship Design. I got a degree in History of Science. I always loved the interplay of science and technology and how it impacted society. I didn't go into the Air Force. I ended up going into the Air Force Reserve and I went to work for a small company. And two years into that job I was going to go back to college to get a PhD.
When I resigned from my employer, the DuPont Corporation, a mega chemical company, they wanted me to finish a computer simulation for them. And the computer model was going to be used to justify a billion dollar capital budget. I just happened to be a 24-year old on the critical path to getting a billion dollars for someone that wanted the money. And so, they wanted me to stay. I didn't want to stay. They offered me a raise. I said, ‘I want to be a professor.’ They said, ‘What do you want, other than being a professor?’ I said ‘Well, the only thing in the world I want other than being a professor is to start my own company and be CEO.’ And I said ‘If you want me to finish the computer simulation, then why don't you finance my company and give me all my current employees at DuPont’.
“Well, when it fails, I'll go back to school”. But, it never failed, and it kept doubling and doubling.
Long story short, about ten people from DuPont came to work for me, I got free office space for three years, and they gave me the first $3 or $4 million worth of business for no equity.
MicroStrategy was launched when I was 24. I was just at the right place at the right time. From there I thought “Well, when it fails, I'll go back to school”. But, it never failed, and it kept doubling and doubling. Pretty soon it was too late to go back and get a PhD. So, this is my postgraduate work for the last 30 years.
BJ: What do you do in your free time?
MS: I like architecture. I'm a big lover of all manner of landscape architecture and residential architecture. I feel that architecture is the blending of art and engineering. And there's a little element of sociology in there: can you build something that's beautiful, yet functional at the same time? I would say it's one of my passions. I also like to read. I like science fiction.
BJ: You were quite young when MicroStrategy launched. What struggles do you remember encountering when you were first launching the company?
MS: When we first started, we were working on Macintosh computers. Everybody said corporations will never use Macs, they only use Windows. When companies were using DOS, we had a Macintosh with the graphical interface running. People told me my choice of technology was crazy, but we doubled and doubled. And then, around the time people didn’t want to use Macintosh computers anymore, we managed to get it to work on Windows. We built another version of our software on a spreadsheet with a scripting language Wings. Everybody said, Microsoft Excel is going to crush everything, you can’t just use Wings, but we still doubled and doubled.
“If you’re going to last in the software business, you have to be like a snake prepared to shed its skin every few years, and then you go to the next thing. And the next.”
By the time Wings was discontinued, we switched to a Microsoft product. We started working with Visual Basic. Still, people said you can’t write good software on Visual Basic, but we still doubled and doubled. We then switched to C++ because they were right. Then they said we can’t work with relational databases - that it would never work.
It was one thing after another like that. I’d say we went through about 10 generations of technology and the theme was always to do something that works with the best tools at hand, and then in time I’ll upgrade to the next thing. That’s the story of technology: if you’re going to last in the software business, you have to be like a snake prepared to shed its skin every few years, and then you go to the next thing. And the next.
BJ: Let’s talk current events. How has COVID-19 affected your business in the past year?
MS: I think that the big impact of the pandemic crisis is that we have all learned to embrace a new trend called the ‘Virtual Wave’. The virtual wave is the dematerialization of all sorts of products, processes and the way people interact. For example, you and I are speaking via Zoom. Before COVID I didn’t use Zoom. In fact, before COVID I didn’t believe that video conferencing would ever work because our previous video conferencing technology was very close up, it would drop in sound, and it wasn’t very high definition. So the technology wasn’t really embraced before COVID. We thought that we would HAVE to meet everybody face-to-face, and everyone has to be in the same place.
When we went through this, first of all, we couldn’t travel everywhere, and all those events we were using to reach people were canceled. Then we realized we couldn’t meet face-to-face, so we embraced new technologies and techniques.
One thing we realized is that we could move anywhere at the speed of light. I’m talking to you right now at the speed of light around the planet. What followed quickly was: if you punch the record button, I could speak to you, then upload it to YouTube and 100,000 more people might hear it. And they might even hear it while I’m sleeping.
What I say to all my executives and everybody at my company is: “You can now Zoom anywhere at the speed of light and bend time and space. What are you going to do with it?”
That’s a big epiphany of the Virtual Wave. Instead of one meeting a day, I can have eight meetings a day. Instead of hiring someone to work in Seattle, I can hire someone to work in Chicago that takes a meeting in Seattle, Chicago, Milwaukee, San Francisco, and LA on the same day. Right? Instead of meeting with a customer to explain how the software works for an hour. I can meet with a customer and explain how the software works for an hour, push the record button and upload it. 400 salespeople can then send my video ten times each, and before we know it, 400,000 people have seen my software tutorial with the same exact message.
I have engineers in China that are awake when I am asleep. A customer can call from New York, and we pass the recording of the call to the engineers in China to work on while we are sleeping. They pass it to Warsaw and work on it while the engineers are sleeping, and then 24 hours have gone by and people in three different cities have been working on the same problem for a customer in New York.
Most importantly, it changes your definition of ‘local’. ‘Local’ now means: in my timezone + speaks my language. It is pretty terrifying, right? To be told that you can’t work in your office and to be brought all these challenges. I think it has been empowering and invigorating because now you think I can tap into human potential wherever it might be on the earth.
CRYPTOCURRENCIES AND BITCOIN
BJ: Let’s talk crypto. How did you first come across Bitcoin and what was your initial reaction?
MS: I first heard about it by rumor back in 2012 to 2013. People in the crypto community still point out to me that in 2013 I tweeted ‘Bitcoin days were numbered’. When you read about Bitcoin in news stories, you don’t really understand it, right? It’s like hearing the echo of a shadow of something going on. It’s like Plato’s parable of the cave: you never saw the thing, you just saw the twisted shadow of the thing. And that was it, I didn’t think about it and I tweeted that and forgot about it for seven years.
I literally didn’t pay any attention to Bitcoin until the pandemic came along, and then all of a sudden our world turned upside down. We had to embrace ideas that we had previously rejected. I had rejected the idea of remote work until I had to embrace it. And then, when you have war, it has a way of opening up your mind to new possibilities. If you read ‘The Structure of Scientific Revolution’ by Thomas Kuhn, you look at the history of science, and people only change their mind and open up to new ideas when a new generation comes along. The new generation gets crypto. But for the older generation, Generation X, baby boomers, anybody that didn’t grow up with crypto, there has to be war. People will learn new things during war, if your life depended on it - you have to.
"I literally didn’t pay any attention to Bitcoin until the pandemic came along, and then all of a sudden our world turned upside down. We had to embrace ideas that we had previously rejected."
We have this war in COVID and this currency war, and between the two of them our minds have opened up. I realized the world was a different place. I saw asset inflation rates running 10 to 20%. Once you saw the actions of the Fed and Main Street economies shutting down while Wall Street was bouncing back, you saw this recovery of Wall Street from Main Street. This punctuated this idea that maybe there’s something different going on here.
I realized that there is no inflation on YouTube streaming views, but there is inflation in bonds. If you can manufacture something with information and stamp out a billion copies of a song on Spotify, there’s not going to be inflation on that, no matter how much money gets printed in any currency.
“I better find some asset that is scarce, that can be debased and it sent me on this intense treasury hunt to figure out what to do with the money.”
On the other hand, if you wanted to buy a bond that would allow you to retire for the rest of your life in 2009, that would cost $1 million dollars. But in 2020, that would cost $10 million. Therefore, that bond went up by over 1,000% over ten years, or about 22% a year, so the cost of buying early retirement is inflating at 22% a year in cash. Bonds had a 22% inflation coefficient, and I realized stocks had about an 8 to 9% inflation coefficient. Then you know, a Picasso is going up at 2% a year.
That was an epiphany for me: there are many rates and you can choose whatever rate you want, but, the asset inflation rate has been running 7% for a decade. Then I realized it’s running 15%. If you were holding all of your life savings in a cash bank account your cash bank account is losing 10% of its purchasing power a year you’re never going to save enough money to get that early retirement.
You just can’t save enough money to get there, so that was the epiphany that came to me after pandemic crisis, and that caused me to open my mind to the idea that I better find some asset that is scarce, that can be debased and it sent me on this intense treasury hunt to figure out what to do with the money.
BJ: You describe bitcoin very much as a hedge against traditional markets. How did you come across it again?
MS: I started cycling through – I said I have a lot of currency - a lot of cash. I cycled through every asset that you might purchase, that might inflate at the rate of asset monitoring inflation. So I was looking at the asset inflation coefficient.
Could I buy real estate? Real estate is complicated because half of it is commercial real estate which is theaters, stores, and they aren’t reopening. So it was hard to figure out how I could invest in real estate and get something which is not impaired at fair value.
Then I thought bonds? But, I couldn’t find any bonds that yielded more than 10% nominal interest. And if you expect 10% monetary supply expansion, then they all have a negative real yield.
What about stocks? It looks like they’ve already recovered. They recovered radically in April, and they already bounced up to all time highs. It doesn’t look like they’ll tread water. Maybe they’ll expand 7 to 8% a year, but, maybe they won’t. There is a lot of risk with regard to Main Street companies. There’s a lot of enthusiasm, Wall Street recovered very quickly, but, Main Street didn’t recover and still hasn’t recovered - so I thought there is a lot of risk there.
"The whole idea is digital scarcity and bitcoin is the most popular one."
Next, I went to precious metals, gold, and silver. But, people are creating more gold every year, 2 to 3% more every year. And there’s counterparty risk if you put all your money into gold. The gold that is put into a bank vault in any of the hundreds of cities in the world in the year 1900 - how many of those cities do you think would have still had your gold in it in the year 2000? Because I think every city in the world, with the exception of maybe a couple such as Zurich or Geneva, had a regime change and the bank and government fail. Beijing, Tokyo, Paris, Berlin, South America, everywhere in Africa and you’re like what about America? Roosevelt seized gold in 1933. Spain- there was the Spanish Civil War. You might find five cities out of the hundred where you wouldn’t have lost your gold. And if you didn’t lose all your gold, it is getting inflated 2% every year.
I cycled through every asset class I could think of, even art. Then I thought, I discovered this cryptocurrency and I said: “How does this work?”. The whole idea is digital scarcity and bitcoin is the most popular one. So it’s the one I looked at first, and bitcoin has about a $200 billion market cap and the entire crypto industry is about $350 billion. So it was the first thing that we were going to invest in. It made sense that we would pick the oldest, with the largest market cap, greatest liquidity, most security, and most hash power.
BJ: How do you view cryptocurrencies and why did bitcoin stand out?
MS: My view is you can divide cryptocurrencies stablecoins, like Tether or something that is meant to emulate an actual currency, and then there are cryptocurrency assets. A lot of people criticizing bitcoin will say that it doesn’t do transactions, it doesn’t do smart contracts, it’s not as flexible. Well yeah, it just might mean it’s not ideal for cryptocurrency applications. It’s too volatile. It’s not good for cryptocurrency because if it’s volatile you get killed on the taxes.
Every time you buy and sell, you get a tax bill so you don’t really want the price to change because you don’t want to have a thousand different taxable events each year. It destroys your accounting system. Because of that, it’s not so good for applications, but, what it is good for is what we wanted it for.
What we wanted to do was put hundreds of millions of dollars in a secure crypto vault and leave it there for a long period of time, protected by a lot of hash power, and a lot of encrypted electricity, along with an ethos of security and trust. Because if you’re an engineer, you know that you can either go for features or you can go for rock solid, robust, unbreakable. But you can’t have both. You can prioritize one or the other, and every time you add a new feature, it just becomes one more thing to break. That’s why we focused on bitcoin. And I think it’s the best choice as a crypto asset network right now because it has such a dominant share of the Proof-of-Work.
If you’re going to invest hundreds of millions of dollars, you’re going to wait until everything is very stable and you’ve seen three, four, or five years of experience before you figure out what you’re going to do there.
BJ: Do you see yourself diversifying MicroStrategy’s portfolio in the future into other cryptocurrencies?
MS: We don’t have plans to that effect right now. Our strategy is to operate MicroStrategy using bitcoin as a treasury reserve asset. We operate in 27 countries, for instance, if I do business in China I’m selling into the Chinese Yuan, or the Yen in Japan, or Euros throughout the European Union, and US Dollars in the US. We pay bills in that currency, we pay our payroll in that currency, we pay our taxes in that currency, we do our accounting in those currencies. Then we swap our excess working capital into US dollars. And from there we balance our out working capital accounts everywhere in the world. If we have excess cash that we don’t need as working capital we sweep that into our treasury. And once it gets into the treasury, we look at the market conditions and sometimes we’ll buy our stock back if the market conditions are right. It’s possible we’ll buy bitcoin if the market conditions are right. If we didn’t like the market conditions we would leave it in cash, but, generally our preference, all things equal, is to convert the cash to bitcoin, and then we would let it sit there for a long, long period of time because the purpose of Bitcoin is to be an asset inflation hedge over a long period of time.
BJ: How exactly did you execute this purchase of over $400 million in bitcoin? Can you walk us through the process?
MS: It was in two stages. And there’s some things I’m not at liberty to share. But, the other things I can share are: we obviously went through a fairly detailed process of doing due diligence on all of the possible institutional grade brokers and institutional grade custodians in the space. We had to build a set of relationships that we felt we could trust and were comfortable with. The first stage was about $200 million and $50 million - which took multiple days. Over those days we would programmatically buy it. 24 hours a day - every 3 seconds. We pretty much broke it up into something on the order of 80,000 to 90,000 individual trades. And they were all like one third of a bitcoin or something. We would spread them across every exchange in the world so we literally were making the market or in the market for many, many, many days. Not weeks. But like 3 to 4 days.
You’re never going to see a company like ours try to buy millions of dollars chasing it, we’re always going to wait and let the market come to us - otherwise we’ll just sit and accumulate.
We would basically buy at the market and then we would have large aggressive orders if the market dove down. If someone spiked it down with a massive liquidation on BitMex or something like that, we might buy $20 to 30 million a day at the market rate, or we would buy $30 million in 10 minutes or 5 minutes. What we didn’t want to do was the opposite. We didn’t want to chase the price of bitcoin up. You’re never going to see a company like ours try to buy millions of dollars chasing it, we’re always going to wait and let the market come to us - otherwise we’ll just sit and accumulate.
That’s how we did it, we just tried to be responsible. Some people go in there and try to buy a million or $10 million worth of bitcoin in a minute and you can see it spikes up the market. And some people try to sell. They try to sell $10 million of it and I think my advice to anyone is: don’t do that. That’s pretty foolish. There’s two ways to see it. If you’re a bitcoin holder, and you’re looking at the market trading and it spikes down, you might say “Oh well, I’m afraid that that’s a bad thing for bitcoin, the price is crashing”. If you’re a bitcoin accumulator, you see it spike down and you kind of smile and say, “Me or somebody like me is getting a lot of bitcoins cheap from someone that just panics right away”. So it’s actually good because the person that wants to own bitcoin gets to buy some cheap in a hurry from someone that’s panicky when the price dumps. When I see it spike down, what I see is a very disciplined deep-pocketed buyer is getting a bargain and someone else who’s panicked and wants to get out in a hurry is taking a haircut. If you’re not in such a hurry you’ll get a fair price. So when I see someone trying to buy a bunch in a hurry or sell a bunch in a hurry it seems a rookie move. I don’t know why you’d do it but there’s some people that do it – I feel sorry for them. To tell you the truth. I just feel sorry for them.
BJ: What were some worries going on in your mind during the execution of the bitcoin purchase? If you had to do it over again, would you do anything differently?
MS: I guess my number one worry is somebody in the world that thinks like me buys it all before I could buy it, this drives the price up and I have to chase them. I'm worried that there's someone else that has my same views in the world - that's what I'm worried about. And I'm hoping they all disagree with me. If nobody disagreed with you, then you couldn't buy it, could you?
BJ: If you can share, how did the public first find out about this large bitcoin purchase, I imagine this was all done very secretly?
MS: We wanted to move through this process in a respectful, precise, yet delicate fashion. One of the general good rules in life is try not to surprise your partners if you have partners. So we're a publicly traded company, and our partners are the other shareholders. So the first thing we did was make an announcement to the shareholders, that we were concerned about asset inflation and macroeconomics, and that we felt that we needed to do something with our large treasury of cash.
We expected that we would use a portion of it to buy our stock back and use a portion of it to invest in other assets that would be an asset inflation hedge. So we announced that. And we let the market digest that. And then a week later we announced a tender offer where we offered to buy $250 million of our stock back at a premium to where the market was trading. And we simultaneously announced that we had acquired $250 million worth of bitcoin. That way for people it's not a total surprise, people knew that we were going to do this. They had a chance to digest it. Then we accelerated the timetable. We said “Now we’ve done it and by the way, we're ready to buy back $250 million worth of our stock and we'll do it at a premium.”
And that means that if you would like to exit your position, if you don't want to be a shareholder, then this is your opportunity to sell at a profit. And if you like this idea this is your opportunity to hold and this is what we're doing so you understand now. That’s a respectful thing, because you don't want to surprise someone and just drop it on them. So then the market had 20 days for this tender offer period. And during that period, they can adjust and some people bought and some people sold during the tender period, and the stock traded a little bit below the tender price and then it traded above the tender price, and you know, it did what it did. And then the tender offer period closed. And when the tender closed we didn't know whether we would get $250 million of stock tendered or not. As it turned out we got about $60 million worth of stock tendered at the top of the range, so we attended at $122 to $140. The stock was trading in the low $120s, when we announced the offer it traded up above $140. We bought back about $60 million dollars worth of our stock at $140. And then we had some extra cash because we had a larger treasury.
We had about $175 million of extra treasury cash. Then we thought we should announce to the public that we might buy more bitcoin than we had. And so we put out another 8,000 in bitcoin. And that way everybody in the market knew that MicroStrategy is not going to be capped at $250, they might go beyond it.
"If you want to go fast, go alone and if you want to go far, go together."
And that gives everyone the chance to buy or to sell, right? I mean they know. No surprises. And we then converted another $175 million cash into bitcoin. There were many stages in disclosure so that everyone got a chance to understand and internalize to either buy or sell on the news. We only want shareholders that are aligned with the company's strategy. That's just good karma. As a general rule: treat others as you would like to be treated and don't surprise people if you don't need to. It makes it a little bit more complicated right and we have to be more deliberate. We can't always go as fast but there's that saying right? If you want to go fast, go alone and if you want to go far, go together. So that's how we did that.
BJ: On the flip side of buying, do you have any stop-loss in mind for bitcoin, in case the price should dump or are you planning on HODL-ing through the highs and lows?
MS: I think our view in general is that bitcoin is an ideal treasury reserve asset. So, that means that we bought it with the intention of holding it for a long, long, long time, not trading it. If you told me it would be 10% less or 10% more, or 20% less or 20% more or whatever I wouldn't wait to see what the volatility was to see if I could get it cheaper, because I just don't know what the future holds.
"We bought it to hold forever."
We bought it to hold forever. I mean, as Warren Buffett would say the ideal holding period on an asset is forever, right? We're not really traders by nature and we thought that it wasn't a good treasury asset we wouldn't have bought it at all.
BJ: What price do you think bitcoin can achieve in 100 years?
MS: You know I wish I could give you a projection, but, I don't have one. And I don't know the future- I have no crystal ball. I do think there are expectations - when we look at all of the different assets we feel like bitcoin is an ideal long duration asset because it's decentralized. And it's not a security being issued at the whim of one single company or a small organization. It's very decentralized across lots of jurisdictions. There are lots of companies and lots of individuals and lots of municipalities and if it falls out of one of them, it's kind of anti-fragile. And I would think that it will be picked up by another one. I love the anti-fragility of bitcoin because say somebody says you can't mine it in your country. Well, the mining will just shift to another country. When a company is headquartered in a place, it's much more fragile because you can put it out of business. But when something is decentralized and has no headquarters it's likely to grow in someplace where it's shrinking in another place. And that's a good thing if you want to take a very long view, and we are taking a long view on this.
BJ: Are you a believer in bitcoin solely as an economic hedge or do you have interest in blockchain technology itself?
MS: I think that bitcoin is two things: it is a scarce digital asset and a hedge against asset inflation, but, it is also the first true digital monetary network. I mean the first and maybe the dominant digital monetary network. And when I say digital monetary network I put it on the shelf next to Google being the first digital search network, YouTube being the first digital video network, Apple being the first digital mobile network, and Facebook being the first digital social network. It's a pretty powerful thing. I would describe it as digital gold, but, that means it's harder, smarter, faster and stronger than gold. The harder part is it's just better than gold because it's not going to debase to 3% a year and there's no counterparty risk like there is with gold - so that's the inflation hedge. And that's a big edge. I also looked at the technology side that you point out which is all about crypto networks and the openness of the network and I think that makes it smarter, faster, stronger, and that's because it's dematerialized gold or virtual gold. If it's virtual gold. I can take the $100 million dollars of gold, slice it into $10 million dollar pieces and I can move it around every second. You can't do that with gold.
I can create a program that does 87,000 micro loans on that block of asset, I can do it in 10 countries, and I can do it for three hours at a time. Or I can, I can wrap that gold with face ID or touch ID and build it into Apple Pay. Or I can get to the point where I can talk to it using Alexa, wrapping modern client technology in it. I can have a server, which looks at 10,000 people that want to borrow against their Bitcoin, and they bid on their interest rate they want to pay like an eBay of interest. I can match the two and perfect an eBay-type clearing market on a Saturday afternoon. I can't do that with gold. You can do that with a cryptocurrency.
"It’s got an upside that feels like buying Apple, Facebook, Google, or Amazon a decade ago, where it could go from here is pretty interesting."
It's a bearer asset and it can be proven. It can be verified instantly and it can be delivered in minutes. I think that that allows you to program it. And that means that as the software improves every year for a hundred years. And as the hardware improves every year for a hundred years. And as the ecosystem of options improve, such as Square, Apple, Binance, and Coinbase. This thing just keeps getting better and better. And that makes it a technology play. It's not just indestructible gold that you can't mine. That would still be a dumb rock. But it's virtual gold you can program, which means that it's probably going to hold its value better than gold. It’s got an upside that feels like buying Apple, Facebook, Google, or Amazon a decade ago, where it could go from here is pretty interesting.
BJ: You mentioned YouTube, Google, Facebook being the first, but in reality there were other firsts such as AltaVista, AOL, Myspace before. Do you think Bitcoin will always be ‘King’ in terms of dominance in the cryptocurrency market or do you see another token coming up in the future that could overtake it?
MS: You’re right on that point. I mean long before Facebook there was MySpace, and before Apple, before the iPhone, there was the BlackBerry. Before BlackBerry there was Nokia with their smart gadget phone. And before bitcoin there were other crypto attempts like e-cash, e-gold, Digicash and things like that. Bitcoin was the first one that really worked.
I would also say there were many attempts of streaming video - I mean Mark Cuban had a streaming video company that he sold out to become the billionaire the is that predated YouTube. But, here's the distinction I make. There's plenty of examples of billion dollar, two billion, five billion companies that were first but they didn't win. But, there aren't many examples of $100 billion dollar digital networks, that got to be 10 times or 20 times bigger than its next competitor, that subsequently vanquished. That's a much less common thing.
So now when bitcoin was two or three or five billion dollars in market cap, its future was uncertain. But, it's $200 billion right now. And when you get to $200 billion it’s different. When YouTube crossed $100 billion dollars in value, when Google was more than $100 billion, when Amazon was more than $100 billion in value. When Apple got to be more than $100 billion in value it was pretty clear there was a massive inertial network effect there. People forget Apple almost went out of business in 1997. Michael Dell said to Steve Jobs, “You should just shut it down and get the cash back to the shareholders.” The company that became the most valuable company on Earth - it could have failed. I think by 2010, the iPhone 3, it was pretty clear this thing was going to work. And if you didn't believe that somewhere between 2010 and 2015, it was pretty clear that it's a juggernaut. You can find many conventional thinkers and traditionalists that would have said in 2012 that they didn’t believe in Amazon, Apple, Google. Or “We don't invest in technology”. I mean Warren Buffett famously said, “I don't understand technology, I don't invest in it.” But, I think today you'd be hard pressed to find very many people that think that technology is about ideas. Now I think what the world realized this year is if there are 15,000 retailers competing against Amazon - Amazon might very well eat them all.
So diversifying into a market basket of retailers if you have one that's dematerializing the entire category isn't really risk averse. You're actually taking more risk to not bet on the winner. And that's what I think with bitcoin. I think there were challengers, sure. But, I think that once you get to a $200 billion market cap you have the right to say that you're the main dominant player. And it really does dominate the Proof-of-Work, store of value space. Because I think the next competitor is Bitcoin Cash - and that's 50 times smaller. I really think that when you're 50 times bigger than the next one in line, it’s pretty clear that you're the winner.
If you're making a large treasury investment then you would want to bet on a dominant network. If you're a venture capitalist, you have a different pool of capital. Venture capitalists invest in companies where they're thinking, “Well, it's 90% likely to fail, but, I'll get paid 100 to one.” That's reasonable, but, it's a different kind of investment strategy than the treasury strategy which is: I kind of just don't want to lose my money. Bitcoin is at an interesting stage where it's big enough to be reasonable to invest in, but, it's small enough that it can grow by a factor of 10X, or 100X, and that's what makes it interesting - an asymmetric risk vs. reward on characteristic.
BJ: What other industries, besides finance, do you see blockchain technology disrupting the world. What industries in particular do you think it will have larger impacts on?
MS: I think that the idea of blockchain decentralized consensus driven networks is really powerful for sovereignty. If you want something to go on to transcend domains, you want it to outlast governments, outlast jurisdictions. So if you're looking for longevity. Or if you have an application where you have a regulatory deadlock or a situation where there's a lowest common denominator.
If I do business in 100 jurisdictions. And one of the jurisdictions says, “You're not allowed to do that.” When I run into that jurisdictional systemic lock on innovation, I can't innovate, because 1 out of 100 jurisdictions I'm in makes it illegal. When you have that regulatory situation it is crippling to innovation.
I think blockchain technology is the solution because it's going to evolve rapidly. Not at the rate of the lowest common denominator, but at the rate of the highest common denominator. And so it's an anti-fragile ecosystem. I'll give you an example. It might not be allowable to trade options in the United States on an exchange at the same time as you sell the underlying asset. But, say it is acceptable to trade options in another jurisdiction, maybe in Singapore, where you can have options on the market, or in Malta, or somewhere in a decentralized blockchain system. The exchange spins up in Singapore and attracts $100 billion, because you can trade the options. And that creates demand for the underlying asset. And then everybody everywhere in the world benefits, a rising tide lifts all boats.
The energy that comes from the most innovative jurisdiction is channeled into every jurisdiction via the blockchain. Whereas, in a centralized operation, you couldn't do it anywhere unless you can do it everywhere. You almost want these kinds of interesting market ecosystems because the innovation will go more rapidly in some places.
I like the idea of licenses, titles, and provenance on the blockchain. My last will and testament - some immutable document that I wish to wish to have where no one can edit, censor, or change it. If I want to make a statement to the world for one thousand years unedited.
Or maybe I just want to prove my provenance, I want to prove something through keys. If I wanted to grant a title or write a key - something that I felt was really important to protect over time. Or if I wanted to enter into a business where the centralized players are crippled by their local regulation, they cannot evolve fast enough. I think that those are two legitimate areas for blockchain and the market is working to sort that out right now. There’s lots of experiments where people are trying mixtures of these things to create decentralized computers where all computers support, store, and authenticate other things in the blockchain.
I also think that probably blockchains will link with each other. The Bitcoin chain will probably power, and probably should power, either via energy or via security, these other chains. I think there's an entire ecosystem where people need that. I need to know in 30 years that I will be able to finance my last will and testament. If I'm leaving money to my granddaughter on her 21st birthday, I would like to know that the money will be there, even though she isn’t born yet. If I wanted to finance a trust. I would also like to know that nobody can hack it.
With anything that you care about or you love with a passion - it might be your family, it might be the park, it might be a charity. If you want that last will and testament to go on for long periods of time, even after any given company might have failed, or lost that mission, then the blockchain is a good way to do it. And that's why I'm excited about the technology.
BJ: Do you have any thoughts on the DeFi craze and what’s going on right now with yield farming?
MS: I think that there's a lot of ferocious experimentation going on right now and a lot of innovation and learning. Some people are making money and some people are losing money. I think that there are two poles of the crypto industry: one pole unregulated cyber Vegas meets finance networks on steroids. And then the other pole is the savings and loans at the end of the universe. It's like the world's safest savings and loan network. You walk into it and you put your money into it to save for the next decade or twenty years and you feel safe and secure that you did it. And those two extremes I think are both flourishing.
"One pole is unregulated cyber Vegas meets finance networks on steroids. And then the other pole is the savings and loans at the end of the universe."
If you characterize crypto as one or the other, you do both a disservice. I think the crypto industry would benefit from segmenting the market and say: this is crypto banking, this is crypto DeFi, this is crypto application, this is a crypto exchange, this is a crypto asset, this is a cryptocurrency. If you give people different segments of the market everyone can do their thing and be in rise to be the champion of their segment. Be respectful of the people that choose to invest in your thing. You would never want an 80-year old retiree to put their money into the savings alone, but, instead get the cyber Vegas. But you know, the other person wants the cyber Vegas, or they want the crypto exchange, because that's what they want. And as long as people are fully disclosed, I think some good can come of it. I think that if you're lacking that disclosure, then innocent people could be hurt and that wouldn't be good for the industry.
BJ: In your book ‘The Mobile Wave’ you talk about how mobile computing will become pretty much an extension of the human body and an essential tool for modern life, could we possibly see a sequel to the book with included thoughts on how blockchain or Bitcoin will be ingrained into that mobile society?
MICHAEL: You know I thought about the next book being ‘The Virtual Wave’, but, I'm so busy living it right now that I don't know if I’ll write the book, so we'll see. I feel like the world has changed so much in the past ten years that people would rather see stuff published immediately on Twitter or through video. So I'm doing a lot more communicating in that regard.
BJ: Just one last question for you. In this hectic year, what’s your outlook on the global economy to close 2020?
MS: I think that every business is going through a transformation this year. And it's that virtual transformation, and they're rethinking what their product is and what their services are. They’re also rethinking their balance sheets their operations with their employees. And they're all coming to different conclusions because they all have different circumstances.
They're all in different businesses and that's going to take years probably 2 to 3 years before it sorts itself out. So I would say we'll end the year in transition. And the story will still be evolving. If you read the stories in modern business media today, they're discovering things every single day. We didn't realize this was going to happen. We didn't know. I would predict that at the end of the year you're going to still see an unfolding of this virtual wave transformation, because there's a certain rate at which the economy could digest these changes and they just can't go faster at the moment.
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