How Passive Indexes Are Funding MicroStrategy's Bitcoin Purchases
BLOK’s NAV returns were up 24.89% in November, leading the YTD performance to 67.73% (see standardized performance). This positive performance was achieved broadly and certainly reflects the optimism around crypto policies and the more friendly regulations that are expected to come from the new administration. More important than just price action, we believe that companies and investors can now begin to truly again embrace the inevitable future of blockchain innovation. In January, BLOK will celebrate its 7th year, so it is with tremendous pride we conclude this year with great results and optimism.
We are working through our outlook for 2025 and want to share the following 5 predictions related to Bitcoin. Next month, we will share another 5 predictions, which will focus more on the transformational change that is coming related to tokenization and blockchain. Enjoy the insights and always feel free to challenge our thinking. Evolutions are harder to predict than revolutions.
- Management Turnover: Investors should be prepared for management turnover to accelerate in 2025. There are 11 data centers/Bitcoin miners with market values north of $1 billion. In aggregate, the market value of these companies is about $36 billion. Institutional interest has finally taken shape in 2024 as many of the companies have diversified into the AI/data center management business. Our surprise #1 prediction will be that at least 11 of the 33 top positions across these companies will be taken over by new leadership… Yes, that is a third of the members of the executive suite - chairmen, CEOs, CFOs and/or COOs will be different. The industry is young in many ways, and management talent can get exhausted. This prediction is not meant to suggest anything scandalous. Turnover, however, can be disruptive.
- Capital Access Remains Bullish: Liquidity continues to transform the data center/Bitcoin mining industry. Access to capital is a competitive advantage for growing companies. Regulation becomes more welcoming with the new administration and the IPO market comes alive again. We believe it is likely that at least six blockchain companies will become public, including Coreweave, Core Scientific’s largest client. A higher Bitcoin price provides a strong outlook for miners who have scale, but the wild card is whether transaction volume becomes more consistent. We predict that venture capital in this space will also accelerate further. Crypto profits generally get poured back into the system.
- Bitcoin Treasury Adoption Accelerates: The number of public companies allocating Bitcoin to their treasury is currently about 50-60 small companies (see further details at BitcoinTreasuries.net). With the accounting rules by FASB (Financial Accounting Standards Board) now established and officially taking effect in 2025, more large companies can test the waters. The variable is whether some firms will choose to invest through ETFs and/or the 144a bond market. We are optimistic that SAB 121 will be repealed so that banks will not have to book liabilities against their clients’ crypto exposure.1
- Members of Congress and State Treasuries Embrace Bitcoin: Government adoption of Bitcoin as treasury reserve becomes more evident in 2025. There are already 10 states likely to pursue regulatory initiatives to buy Bitcoin. Pennsylvania, Florida, Texas and Wyoming are already friendly to the idea. Members of Congress show further support for crypto through their own personal investments.
- Inflows Into Broad Passive Funds Will Fund MicroStrategy’s Desire to Own The Most Bitcoin: In 2025, Michael Saylor can rest as natural liquidity comes into the MSTR stock that funds his insatiable appetite to own more Bitcoin. As of the time of writing, MSTR owns 402,100 Bitcoin, but by the end of 2025 it would not surprise us to see the company owning over 500,000 Bitcoin. There is lots of talk about the near-term potential for MSTR to be included in the Nasdaq 100 sometime between December 13th (announcement) and 20th (inclusion), but let’s dig deeper into 2025.
- The "FUN" hypothetical! If Bitcoin trades at $200,000-$250,000 that could cause MicroStrategy to displace Bank of America as the 26th weighting in the S&P500 (possible announcement June 2025). To be clear, we are not saying Bank of America will be kicked out of the S&P 500 Index, just that its weighting might be smaller than MicroStrategy.
- Now for a twist of confusion. Is MicroStrategy classified as a software/technology company in the S&P500 or a financial service company? Note that currently there are 37 technology ETFs worth $270 billion, and only 27 financial ETFs worth $94 billion – but, of course, the prize is the $16 trillion in assets that are benchmarked against the S&P500!
These are predictions based on the portfolio managers’ suppositions and research and are not meant to be taken as advice or recommendations. There is no guarantee of any of the predictions unfolding as outlined.
Transactions and Repositing:
We came into November well positioned for what eventually took place. Therefore, we actually did not have to make many changes to the portfolio. Pursuant to our discipline around diversification, we did reduce our exposure to MicroStrategy and Core Scientific (CORZ) as it rallied past our weighting limits. We originally were one of the first institutional buyers of MicroStrategy back in August 2020 at $14 before the 10:1 stock split. We, therefore, of course, have our bias. Regardless, our portfolio discipline requires us to trim the winners in hopes of diversifying into other big winners. November was also the month that we started buying MetaPlanet (3350 JP). We see similarities between the management of MetaPlanet and MicroStrategy. Like Saylor, MetaPlanet’s CEO Simon Gerovich is carefully developing a maverick and brazen social media presence through transparency of his mission. Critical to Saylor’s success has always been his clarity of mission - he simply says what he is going to do and then does it in a systematic manner, for better or worse. Similar to Saylor, Simon founded MetaPlanet in 2010 and substantially sold off most of its assets. According to Simon’s LinkedIn profile, he, like Saylor, has strong ties to YPO and graduated from Harvard with a degree in Applied Mathematics (similar to Saylor’s graduation from MIT with a degree in Engineering).
Most compelling about MetaPlanet is the fact that citizens in Japan have two problems that MetaPlanet solve for. First, the Yen is continuously depreciating. Second, personal capital gains tax on direct Bitcoin ownership is at 50-55%, but on stocks it is 20%. Meaning, there is a natural incentive for individuals who wish to hedge against the Yen depreciation to pay a premium for Bitcoin exposure when it is wrapped in a stock. We are in the early stages of the vision for MetaPlanet and we would expect volatility to create opportunity. The company just doubled its share count through a rights offering, and we would expect future capital raises to continue. Fortunately, the playbook has been written and all Simon has to do is follow his friend’s dance.
We also added to our positions in Cleanspark (CLSK), Marathon Digital (MARA), Applied Digital (APLD) and initiated a small position in Canaan (CAN)...
1 ledgerinsights.com/sec-outlines-criteria-for-sab-121-digital-asset-custody-exemptions/