Carlos Velásquez · Medium · 7 min read · Source: unsplash.com André François McKenzie

As of January 2021, Bitcoin will have existed for 13 years. Not all investors fully understand it. Insurance policies, however, have existed for centuries and are commonplace.

Businesses are accustomed to buying insurance of various types. Holding bitcoin in the company treasury is similar to buying yet another type of insurance: one that protects against the liability posed by monetary inflation.

Families are also accustomed to buying insurance policies for their homes, cars, and health. Holding bitcoin as a family asset is analogous to buying an insurance policy that protects the purchasing power of their future earnings.

Bitcoin, moreover, provides convex return potential that can benefit a company’s stock price and a family’s overall investment portfolio.

Buying bitcoin is akin to having bought an insurance policy from Warren Buffet’s Gateway Underwriters Agency or Geico 20 years ago that would have granted its holder the right to also benefit from Berkshire Hathaway’s shareholder returns during the same period — but with an even larger asymmetric payoff.

Bitcoin is insurance, Antifragilized.

This is the realization MicroStrategy’s CEO Michael Saylor has arrived at and, perhaps, so should you.

MicroStrategy’s Fiduciary Takeaway: Bitcoin Is An Insurance Policy

MicroStrategy is a data analytics company. It is also an early adopter of bitcoin as a treasury reserve asset.

Given the wide-ranging opinions regarding Bitcoin, MicroStrategy raised eyebrows when it reported having purchased 21,454 bitcoins in August 2020 (its net holding is now 40,824 bitcoins, per its December 2020 SEC filing).

In a November interview, Michael Saylor explained his bitcoin investment thesis: the existing monetary system is debased and morally corrupt; Bitcoin is superior.

Saylor is now striving to make companies and investors more knowledgeable about Bitcoin and has set out to:

“…be a responsible advocate of Bitcoin to the investment community; to the corporate community…I have a big passionate interest in just educating the world.” ~ Michael Saylor (John Vallis — Bitcoin Rapid-Fire, at 1:32:49)

Below are two lessons worth highlighting from this interview that a) corporate officers and b) families considering investing in bitcoin can benefit from.

Lesson #1a: craft a win-win strategy for investors

“We went to great lengths to treat the shareholders very transparently and respectfully. We tendered to buy $250 million worth of our own stock at a premium so as to give everybody an option to either opt-in to MicroStrategy with bitcoin or to exit at a profit if they didn’t like the idea.” ~ Michael Saylor (John Vallis — Bitcoin Rapid-Fire, at 9:25)

Key points

Shareholders had two options when responding to MicroStrategy’s bitcoin investment thesis:

• Opt-in: remain a MicroStrategy shareholder with bitcoin in the treasury
• Opt-out: sell their MicroStrategy shares — at a profit

Takeaway: MicroStrategy’s bitcoin investment thesis ended-up facing minimal opposition because its corporate officers preemptively mitigated the financial impact on disgruntled shareholders. The vast majority of MicroStrategy’s shareholders held on to their shares.

Lesson #1b: craft a win-win strategy for the spouse

“The guys that buy it and sell it and think it’s volatile…Why are you trading this stuff?… Buy it and hold it.” ~ Michael Saylor (John Vallis — Bitcoin Rapid-Fire, at 21:37)

No asset is too volatile for an investment portfolio if its position is sized appropriately. If bitcoin is too volatile, consider holding it in a reduced position size that matches your family’s risk tolerance.

Key points

• Underscore that making a small allocation to bitcoin will limit its downside risk while providing asymmetric upside return potential. Refer to Figure 1.
• If necessary, create an “opt-out” plan: establish a predetermined dollar loss that will trigger you to exit the bitcoin position. Arguably, however, bitcoin should be held until one is old, as it will serve as a long-term inflation hedge.

Takeaway: some investors are wary of adding volatile assets to their portfolio; a reduced position size and an exit strategy can address such concerns. In fact, exposure to bitcoin could initially lower a portfolio’s overall volatility due to increased asset diversity. (If the price of bitcoin increases substantially after a bitcoin allocation has been established, a portfolio’s overall volatility could increase — but that would be a nice problem to have.)

Lesson #2a: investment professionals face career-risk; expect pushback from them if your company buys bitcoin

Michael Saylor made himself available to meet with investors who had concerns with MicroStrategy’s bitcoin investment.

Only one investor ended up meeting with him. Saylor recounted this meeting; while Saylor was explaining MicroStrategy’s macroeconomic views and bitcoin’s role as an inflation hedge to this investor…

“…he literally cuts me off and he goes ‘I already know that I own bitcoin.’ And so here is the point: secretly and privately he agrees with me; he’s already got it. In his role as a public representative of his investment company he had to push back.” ~ Michael Saylor (John Vallis — Bitcoin Rapid-Fire, at 11:11)

Key points:

• Investment professionals contend with career risk.
• Deviation from their fund’s stated mandate could result in losing clients.
• The more conservative clients could interpret the fund’s exposure to bitcoin as a speculative deviation from its original mandate.
• As a hedge to this career risk, investment professionals may feel compelled to publicize their concerns with bitcoin on the company’s balance sheet.

Takeaway: in their role as managers of other people’s money, investment professionals may need to come across as a voice of caution. They may even demand meetings with company executives seeking an explanation that they can cite in their monthly/quarterly letters to their clients — even though, personally, they may think holding bitcoin in any investment portfolio is a sound idea.

Lesson #2b: spouses may misunderstand inflation risk; expect pushback from them if you propose to buy bitcoin

Unlike investment professionals who may understand the benefits of holding bitcoin, a spouse may need to be informed of the benefits of a bitcoin allocation in the family’s investment portfolio.

Drawing on readily understood analogies could be helpful when explaining bitcoin as a viable investment option.

“How would you feel if you had a nuclear power plant and a politician showed up and started telling you how to set up the rods. Nobody would consider allowing political interference in most complex engineering systems…Engineers submit their decisions to the laws of nature… There are rules and they are not allowed to break them; and if they break them the engineering systems fail. But in the domain of politics, there are no rules…

People trust engineers.…The magic of Bitcoin is that engineering is arriving to economics for the first time in human history.” ~ Michael Saylor (John Vallis — Bitcoin Rapid-Fire, at 16:16)

Key points:

• Engineers are bound by the laws of physics. Politicians are not.
• Bitcoin is a closed system: capped at 21 million bitcoins.
• Fiat currencies are an open system: politicians increase their supply.
• An increase in the money supply is an invisible tax every citizen pays, which diminishes their family’s purchasing power.

Takeaway: once an understanding of bitcoin’s inflation hedge characteristics has been established, your spouse may feel more comfortable investing in it — and may even want to make a larger allocation into bitcoin than you had initially considered. This could be the case if s/he also learns to understand its convex return potential. See Figure 2.

. . .

Corporate officers and spouses that share MicroStrategy’s bitcoin investment thesis should consider devising a viable bitcoin investment strategy that is amenable to all stakeholders.

Given the current macroeconomic environment, it is within their fiduciary duty to do so.

Author also wrote: N. Taleb’s Minority Rule | Your Inner Voice | Bitcoin’s Volatility | Blockchain Stocks | 50 Investment Lessons | Flywheel Effect | Bitcoin: Mental Framework | Crypto Moonshots | 4 Crypto Stocks | Brief History: Money | Spontaneous Order | Ackman’s $2.6B Moonshot | Fragility Inducing Events | Antifragile: Definition | 1% Bitcoin: 99% Cash | COVID-19: Market

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Disclaimer: Topics covered herein are for informational purposes. Before acting on investment information consult with a financial professional. This article is intended for people who understand the pro/con impacts of tail risk, convexity, and asymmetric risk-reward in the context of an investment portfolio. The price of bitcoin will likely remain volatile. (Lowercase bitcoin is one unit of value embedded in the Bitcoin network.)