The cryptocurrency you may not even know you own

Bitcoin has had a phenomenal year. But its rich returns are paltry compared with those of MicroStrategy, a company dedicated to a risky business: buying bitcoin with money provided by you and other shareholders.

By “you,” I’m not speaking loosely. There’s a good chance that MicroStrategy, which trades like bitcoin’s wilder cousin, is hiding in your retirement account.

I own the stock indirectly, as a holder of Vanguard index funds through my workplace retirement plan. And it is a holding in all manner of diversified stock funds that include small and midsize publicly traded companies run by Vanguard, Fidelity, BlackRock, Morgan Stanley or just about any large asset manager.

As far as MicroStrategy’s stock performance goes, there’s little to complain about — with one glaring exception, 2022. That was a catastrophic year for nearly everyone and everything associated with cryptocurrency because of the fraud and bankruptcy at the FTX exchange, run by Sam Bankman-Fried.

MicroStrategy’s investors lost more than 74% in 2022. It’s hard to bounce back from losses like that. Yet MicroStrategy has. Overall, it has turned in an otherworldly performance, with a 3,000% gain, since Aug. 10, 2020. That was when the company shifted its core strategy from being a so-so provider of business software to a supercharged financial engine powered by debt, stock sales and bitcoin.

Is MicroStrategy risky? Is the sky blue? You can’t get colossal returns like these without taking on outsize risks — exposing investors to hazards that they may never have dreamed of taking in their retirement accounts. The company didn’t comment for this column. But in its annual report, MicroStrategy reveals these hazards frankly, in a voluminous section packed with useful details. We’ll come back to that.

But oh, those stock returns. The company proudly trumpeted them with its last earnings report Oct. 30. They are real but hard to believe.

Sky high

So I checked them on Bloomberg, updated them and found that they were as remarkable as they first appeared. Here are some comparisons with MicroStrategy’s 3,095.4% total return, from its strategy change on Aug. 10, 2020, through Friday:

— Nvidia, whose semiconductors and servers are building blocks for artificial intelligence: 1,179.7%

— Bitcoin, which reached $100,000 Wednesday: 756.5%

— The S&P 500 stock index: 93.6%

— Gold, 29.9%

The Nvidia story will be familiar to anyone following the stock market. It sells all the equipment it can make to other tech companies and reaps enormous profits. Nvidia’s stock performance may not be sustainable at this pace, but it is based on solid earnings.

MicroStrategy is something else. Its software business lost money in the latest quarter, and that operation’s growth prospects are minimal, Gautam Chhugani, an analyst with AB Bernstein, said in a report to clients. Instead, MicroStrategy’s amazing stock returns are based only on bitcoin, debt and market frenzy. The company says it is using “intelligent leverage” — borrowed money — to amass a “strategic Treasury reserve” of bitcoin.

What’s leverage? Say you buy a stock for $10 but borrow $5 to pay for it. You have put down only $5. If the stock rises 50% to $15, you have gained $5, or 100% (not counting the interest you owe). So far, so good. But there’s a dark side. Now suppose the stock falls to $5. It declined 50%, but you have been wiped out.

Michael J. Saylor, MicroStrategy’s executive chair, says its stock will keep rising as long as bitcoin does, but at a much faster pace. That’s because of the borrowed money and the horde of traders who have jumped on the MicroStrategy bandwagon, driving up the price of its shares.

The strategy has been working, so the company is going in deeper. In October, to buy yet more bitcoin, it announced a plan to issue new stock shares and bonds in the form of convertible debt, amassing a cryptocurrency war chest of $42 billion.

Risky business

I wouldn’t buy bitcoin directly. But the MicroStrategy example tells us that bitcoin is already creeping into the retirement savings of ordinary people. Pretending that it’s not there doesn’t help.

It’s worth knowing about MicroStrategy even if you don’t care about cryptocurrency.

The company pointed out in its earnings presentation that MicroStrategy was more volatile than any stock in the S&P 500. Saylor has found a bright side. The frequent ups and downs of its shares create opportunities for quick trading, not only in MicroStrategy but also in options and leveraged exchange-traded funds based on the company’s stock.

With some complications, you can buy funds that try to return double or even triple the daily return of MicroStrategy shares. Then you are multiplying the risk of trading bitcoin several times over, starting with MicroStrategy and then piling on leverage. In a single day, you can experience the thrill of a rocket launch or the agony of a crash, and maybe both.

President-elect Donald Trump, people chosen for top posts in his administration and newly elected members of Congress are embracing cryptocurrencies. Trump and his sons stand to gain as much as $22 million from a cryptocurrency they have promoted through World Liberty Financial, a company that received a cash infusion from Justin Sun. He is the crypto entrepreneur who in October bought a piece of conceptual art containing a banana taped to a wall for $6.2 million.

The prices of bitcoin and other cryptocurrencies have been rising along with the political fortunes of Trump, and it’s hardly a stretch to believe that regulation of virtual currencies will be lighter in the next administration.

That may mean more windfalls for crypto entrepreneurs — and for investors who, unwittingly or not, hold stocks like MicroStrategy in their accounts.

As part of diversified portfolios, MicroStrategy has been easy to overlook. Yet with a total stock market value exceeding $90 billion, it has surpassed Target, CVS and General Motors, and it has been growing at superspeed.

Celebrate if you like, but should bitcoin falter again, MicroStrategy would spread the pain to many thousands of people.

This article originally appeared in The New York Times.

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