For an asset that has spent most of its short, chequered life lurking in the shadows of the financial system it was perhaps fitting that bitcoin broke through the $100,000 barrier for the first time in the dead of night.
The flagship cryptocurrency which has been favoured by drug dealers and money launderers surged past the milestone just after 2.45am on December 5, and this week hit a new high of $108,379.
Its huge advance has made some investors willing to turn a blind eye to the risks, and millions have been piling in.
But it is not just crypto itself that has been soaring. Shares in MicroStrategy, a US company that is essentially a turbocharged bet on bitcoin, have risen by more than 550 per cent in the past year.
That makes them one of the best performers on the US stock market – and British private investors have stampeded in, despite the considerable risks.
MicroStrategy was the most-bought share in November, according to Interactive Investor, the UK’s second-biggest investment platform.
Controversial: MicroStrategy was founded by Michael Saylor (pictured) a tech entrepreneur whose 10% stake in MicroStrategy is worth $9bn on paper
The company was founded by Michael Saylor, 59, a controversial tech entrepreneur whose 10 per cent stake in MicroStrategy is worth $9billion (£7.2billion) on paper. So, is buying these shares a route to get rich quick – or the road to ruin?
Traded around the clock every day, bitcoin has soared by 50pc since Donald Trump’s US presidential election win.
His return to the White House has fuelled hopes among bitcoin believers that he will usher in an era of light-touch regulation, which would be great for crypto.
Trump, who once slammed bitcoin as a ‘scam’, has nominated crypto cheerleader Paul Atkins to lead the Securities and Exchange Commission (SEC), which oversees US stock markets and protects investors.
Think foxes and hen coops.
Bitcoin and other cryptocurrencies may be about to enter the financial mainstream.
Even so, bitcoin – created in 2008 – has no intrinsic value and for years was shunned by conventional investors who baulked at the wild swings in price. It is notorious for volatility, and other risks associated with crypto, including fraud and scams.
Trump has changed all that. He has declared himself a ‘crypto president’ and promised to consider creating a ‘strategic reserve’ of bitcoins for the US government, which could boost prices even further.
This has not gone unnoticed here. Some 7m people – 12 per cent of the UK’s adult population –
now own some crypto assets, according to recent figures from the City watchdog the Financial Conduct Authority.
Saylor once lost $6billion (£4.8billion) on paper in a day at the height of dotcom mania in 2000 after MicroStrategy restated two years of revenue.
The billionaire tech tycoon and two colleagues were fined and agreed a $8.3million (£6.6million) settlement with the SEC without admitting any wrongdoing.
Earlier this year, he and MicroStrategy agreed to pay $40million (£32million) to settle a tax fraud lawsuit.
A graduate of the Massachusetts Institute of Technology, since 2020 Saylor has transformed what was a struggling data analytics firm with a share price going nowhere fast into what one banking expert calls a ‘bitcoin-buying juggernaut’.
MicroStrategy is the largest corporate holder in the world of bitcoins. It owns nearly 2pc of the digital currency in circulation, but it wants more. Much more.
The company is now valued at more than $90billion (£71.9billion).
Remarkably, that is more than twice the value of all the bitcoins it owns. How so?
The short answer is leverage, or the art of ramping up returns by buying assets with borrowed money. The catch is that risks are also amplified, but bitcoin groupies don’t want to hear about that.
Saylor plans to raise $42billion (£33.5billion) in the next three years to buy even more bitcoin. He plans to do this by borrowing money and issuing more shares.
Rough day: Saylor once lost $6bn on paper in a day at the height of dotcom mania in 2000 after MicroStrategy restated two years of revenue
It works like this: MicroStrategy issues new shares at current high values to investors. At the same time, it issues bond – basically IOUs – to hedge funds and other market operators.
One twist is that it pays zero interest on these bonds, which after a period can be exchanged for MicroStrategy shares, so it is costing the company nothing to borrow the cash.
The hedgies and others buying the bonds and lending money to Saylor for free are, in essence, making a bet that MicroStrategy shares will go up enough to compensate them for missing out on interest payments.
As for the company, it uses the money it has raised by selling its shares and bonds to buy more bitcoin.
This sends the price up, which lifts MicroStrategy’s share price even further. That then means it can sell more of its shares and bonds off this higher price to buy even more bitcoins.
And so the rinse-and-repeat cycle continues. The catch, of course, is that a fall in bitcoin’s value could bring the whole merry-go-round to a crashing halt.
Buying bitcoin usually involves using offshore exchanges such as Coinbase and Binance which are not authorised in the UK, so savers have no protection.
Individuals can buy shares in MicroStrategy easily through an investment platform, but the risks are if anything even higher because the company’s strategy of buying bitcoin with borrowed money juices its gains but also deepens any losses.
A bet on its shares could go badly wrong if the extraordinary rally in bitcoin and other digital currencies goes into reverse – so don’t invest any cash you cannot afford to lose.
This is what happened in 2022 when Sam Bankman-Fried’s crypto exchange FTX collapsed, dragging the price of bitcoin below $16,000 and plunging MicroStrategy into hefty losses.
Experts have warned that the latest hike in MicroStrategy’s share price is just another speculative bubble that is bound to burst.
‘It’s symptomatic of a market that has become obsessed with believing in get-rich-quick schemes,’ said David Trainer, chief executive of research firm New Constructs.
‘If you like bitcoin, go buy bitcoin. But don’t invest in a company that’s losing money and also buying bitcoin, because then you’ve sort of doubled your risk,’ he told the Wall Street Journal.
Saylor argues that because there is a ceiling on the number of bitcoin that can ever be produced, demand will exceed supply and the price will inevitably rise, albeit with fluctuations. Like gold, the perceived value of the crypto currency comes from its limited availability.
Bitcoin’s computer algorithm sets a fixed limit of 21m coins, most of which have already been ‘mined’ or digitally created.
‘It is the only commodity invented in the history of the human race that is absolutely capped so that means you can expect it to keep going up,’ Saylor told CNBC news recently.
The value of all bitcoins in circulation is $2trillion (£1.6trillion) – more than the combined worth of all but the biggest companies in the FTSE 100 index.
Investment heavyweights BlackRock and Fidelity now offer bitcoin exchange-traded funds in the US, though not yet in the UK.
All of which means that if it collapses again, then the global financial system may not be immune either. It would also drag MicroStrategy down with it.
‘It could be a giant house of cards that will crush many shareholders when it crashes,’ says Trainer. ‘It has become a
game of musical chairs – you play until the music stops and you just hope you can get out before the crash.’
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