Crypto Entices Skeptics In Its First War

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The value of the Russian ruble is in freefall. Citizens are lining up at ATMs to withdraw and convert cash to other assets. It’s a legitimate financial crisis.

The Russian invasion of Ukraine last week brought a stern rebuke from the West. Financial sanctions are making Russians question the value of their currency. New information suggests they are turning to bitcoin.

Risk tolerant investors should consider buying MicroStrategy (MSTR).

BitcoinBTC was born during the 2009 financial crisis. Overleveraged banks came under pressure when bets on real estate values in the United States went awry. To avert catastrophe the Federal Reserve began digitally printing money at breakneck pace. Ultimately, that liquidity saved many of the biggest bank and insurance companies. However, the crisis revealed something more important: Fiat currency is worthless, technically.

Cryptocurrency is based on math, decentralized authority and the idea that money should not be unlimited. Only 21 million bitcoins will ever be created. It is embedded in the code. Every digital coin is added to a public digital ledger called the blockchain. These cryptographically secure entries can’t be altered or deleted, making the system transparent and trustless.   

Skeptics often argue that bitcoin was created out of thin air. That’s true, yet every bitcoin must be mined using a rigorous cryptographic process. It is far stringent than the way the Fed creates an unlimited supply of U.S. dollars.

The Russian Central Bank operates under the same principles using rubles. The value is based on trust. The ruble fell on Tuesday to a record low against the U.S. dollar as nervous Russians lined up at ATMs to withdraw cash. At one point the currency was down 30%, before the Central Bank of Russia hiked interest rates from 9.5% to 20%.

The writing is on the wall. Raising domestic short term interest rates is unsustainable. The practice also undermines confidence, leading to further selling of rubles for other assets.

To make matters worse, this is not the first Russian financial crisis. The country faced similar debacle in 1998 when the cost of a war in Chechnya ultimately led to currency devaluation and sovereign debt default.

New data suggests Russians and not waiting for a repeat performance.

Trading volume surged Monday in TetherUSDT, a so-called stablecoin that is backed by U.S. dollars. The 519% increase, versus average trade volume this year, was closely linked to ruble-based buyers, according to research from Arcane Research, a crypto data analytics company.

I like to refer to MicroStrategy as the mullet of tech businesses.

Up front it is all business. The company is a profitable buttoned-down enterprise software company. In back the firm is pure party. It is a leveraged bitcoin investment. The Tysons, VA.-based company now holds 125,051 bitcoins.

Michael Saylor, chief executive officer decided in 2020 that owning bitcoin would create more shareholder value than holding cash. Then he started raising debt to buy even more bitcoin. The average cost of bitcoin acquired by MicroStrategy is $30,160.

At a $44,011 the value of its bitcoin investment is now $5.5 billion. The current market capitalization for MicroStrategy is $5.14 billion. That means investors are getting the software business for free.

That business generated $110.5 million in gross profit during the fourth quarter alone. Margins were an impressive 82.2%.  

The Russian invasion of Ukraine is a Seminole development. Apart from the horrific human costs, it is prompting people to take another hard look at fiat currencies. At least in Russia, they don’t like what they see. Bitcoin was made for this moment.

MicroStrategy is not suitable for all investors. It carries a lot of risk. However, investors looking for a leverage bitcoin play should consider adding exposure into weakness.