MSTR: Trading Shells for Gold

A useful analogy for MicroStrategy’s bet on Bitcoin

In my recent post about how MSTR (MicroStrategy) “works,” I used an analogy that I’ll reiterate here:

Imagine someone, centuries ago, telling all their neighbors every year, “Give me your gold for whatever it’s worth in wampum shells today. At some point in the future, I’ll owe you those shells.” Let’s say this person also knows that gold is becoming increasingly scarce, and that wampum shells happen to be appearing on nearby beaches more and more frequently every year. What is this person doing?

Basically, they’re taking on debt in the form of a depreciating asset (wampum shells) to buy an appreciating asset (gold). It’s a great bet. They think something like, “The increasing supply of wampum shells will reduce my relative debt burden, while the decreasing supply of gold will increase my personal wealth.” In hindsight, this would be a brilliant move right?

This strategy is effectively what MSTR is doing with US dollars (wampum shells) and Bitcoin (gold). They are betting that US dollars will decrease in relative buying power over time and that Bitcoin will increase in relative buying power. They take on debt in US dollars and equity to stack up on Bitcoin. So far, it’s paying off.

But the premium!

And yet I still often hear people very confused about how MSTR can trade so far above its NAV (net asset value). I explained it here, but to simplify it: MSTR’s stock price typically trades at a multiple above the value of all the Bitcoin it holds on its balance sheet (today, 11/19/24, it’s trading at about a 3x NAV premium - you can watch it tracked here). If you value MSTR strictly based on the Bitcoin it holds today, you are effectively paying $3 for every $1 worth of Bitcoin on its balance sheet.

The complaint I often hear goes something like this: “Why would I spend $1,000 on MSTR stock to get exposure to just $333 worth of Bitcoin, when I could just spend $1,000 directly on Bitcoin itself?” I’m not here to tell anyone where to spend their money. Instead, what I’d like to do is bring this back to the village / gold / wampum shell analogy, because I think it helps make sense of the NAV premium a lot more.

Back to shells and gold…

So, venturing back a few hundred years again - let’s lay out our primary elements:

• Wampum Shells - the village primarily trades in these shells, which function as the village currency. Interestingly, the village mayor owns a shell-maker that can create new wampum shells whenever the mayor wants. He puts these shells on nearby beaches for residents to find and collect and use. Most people know about the shell-maker, but it doesn’t really bother them much. The mayor makes a varying amount of new shells every year - sometimes a little more, sometimes a little less - and people have just gotten used to this way of life.

• Gold - the village sometimes trades in gold, but the residents are more used to wampum shells, so gold is (for now) the less popular choice for trade. The gold supply is very limited and scarce - let’s say that the TOTAL supply of all gold in the region is 21,000 pounds. There will never be more available to our village people. Generally, folks just save their gold, though trading does happen.

• Michael - our main character (gonna call him Michael) is acquiring tons of gold in his village by trading away his wampum shells and taking on wampum shell debt that he’ll owe in the future. In fact, Michael has started a little company called GoldStrategy. And GoldStrategy has made it clear - its goal is to buy up as much gold as possible, as quickly as possible, trading away wampum shells to make this happen.

• You - pretend you’re a resident of this village. Fun stuff.

Over the last several years, you’ve observed some things. The cost of your groceries has gone from 10 wampum shells to 20 wampum shells per week. And the cost of your firewood has gone from 5 to 15 wampum shells per week. And the cost of your clothing has gone from 2 to 6 wampum shells per year. And so on. Everything costs more shells than it used to. Conversely, everything trades for LESS gold than it used to. And, the trading ratio of wampum shells to gold has changed a lot. Where you used to get 1 ounce of gold for every 25 wampum shells, you now have to pay 250 wampum shells for an ounce of gold. Wild!

Your conclusion - wampum shells suck! And gold rocks! Where the shells have decreased in purchasing power, gold has increased its purchasing power, by a lot. Thankfully, you’ve bought a little gold for yourself over the years (with some crummy shells), but you’re now wishing you’d bought a lot more.

Gold, or GoldStrategy?

Putting aside your regrets, you continue about daily life. One day, Michael of GoldStrategy mentions that you can actually buy a small ownership stake in his company with some of your shells. Should you do it? Or should you just keep trading your shells for gold? Or, should you just ignore gold entirely and stick to shells?

Here’s how you think about it:

1. If you trade your shells directly for gold, you own gold—simple, straightforward, and solid. Gold’s purchasing power has increased dramatically over time compared to shells, so that’s a smart move.

2. But here’s why Michael’s GoldStrategy might be even more intriguing: Michael isn’t just buying gold like you. He’s already amassed 300 pounds of it - about 1.5% of all the gold that will ever exist in the region. That’s an enormous share of the village’s ultimate gold supply, and every shell you trade for a stake in GoldStrategy gives you partial ownership of this massive reserve.

3. Michael’s company is relentlessly acquiring even more gold, leveraging its resources (shells, shell debt, company profits, anything and everything) to grow its pile faster than any individual villager could.

The kicker: If gold’s purchasing power continues to grow and villagers start abandoning shells for gold, the value of Michael’s 300-pound hoard could skyrocket. As an owner of GoldStrategy, you wouldn’t just benefit from the rising value of gold itself—you’d benefit from being tied to the largest and most aggressive gold accumulator in the village.

Laying out the dynamics

• Corporate Influence - Michael doesn’t just own gold—his company controls 1.5% of the entire region's gold. As GoldStrategy grows its hoard, it can start influencing how gold is valued and traded in the village. Villagers might pay a premium to own a piece of the most powerful gold accumulator, anticipating that the company will drive long-term gold appreciation.

• Compound Growth - Michael doesn’t just sit on his gold. He uses gold bonds (corporate debt) to raise shells, which he uses to buy more gold. For example, he might issue bonds to wealthy villagers, promising to repay them in shells at a modest interest rate. If gold’s purchasing power keeps growing relative to shells, he’ll owe less in “real” terms while amassing more gold. Michael also reinvests any company profits from other business operations to grow GoldStrategy’s hoard. This compounding loop makes GoldStrategy shares far more dynamic than simply holding a smaller pile of gold yourself.

• Safety and Simplicity - Villagers who don’t know how to safely store gold might prefer to hold shares in GoldStrategy. They trust Michael to safeguard the hoard and are willing to pay extra for this peace of mind.

So, while owning gold directly is a great way to protect your purchasing power, owning a stake in GoldStrategy positions you to potentially amplify those gains. And sticking with shells? That’s a losing game - you’ve already seen how their value has plummeted. Gold, or a stake in the village’s largest gold hoard, is your best bet for the future.

Is the Premium Justified?

The premium for GoldStrategy shares isn’t just about the gold on its balance sheet. It reflects:

1. Leverage and Scale: GoldStrategy’s ability to acquire gold faster and more efficiently than any individual villager.

2. Influence: GoldStrategy’s growing impact on how gold is valued and traded in the village.

3. Optionality: Income streams that can stabilize operations and fund future gold accumulation, even during tough times.

4. Convenience: Exposure to gold’s rise without dealing with storage, security, or custody risks.

What’s Your-Strategy?

And so, here we are today. Replace wampum shells with US dollars, gold with Bitcoin, and Michael with… Michael (Saylor), and you’re staring at today’s reality. If Bitcoin's purchasing power keeps growing and MSTR keeps acquiring it, their stock could absolutely outperform Bitcoin itself. If Bitcoin falters, so does the whole strategy. But whether you stack Bitcoin or MSTR, at least you're not betting on a pile of shells.

Oh, and you. You’re still part of the story. Your move.

NOTE: This is for educational purposes only and not financial advice. Please consult with a financial professional before making any investment decisions.