War is raging in Ukraine, and the value of the Russian ruble is in free fall.
Citizens are lining up at ATMs to withdraw and convert cash to other assets.
- For Russia, 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 … and it’s pointing to a rise in cryptocurrency usage.
Crypto’s First War
New information suggests they are turning to Bitcoin (BTC).
Bitcoin was born during the 2009 financial crisis … but for a different (although somewhat similar) reason.
Overleveraged banks came under pressure when bets on real estate values in the U.S. went awry.
To avert catastrophe, the Federal Reserve began digitally printing money at a breakneck pace.
- Ultimately, that liquidity saved many of the biggest bank and insurance companies. However, the crisis revealed something more important: Fiat currency is technically worthless.
Cryptocurrency is based on math, decentralized authority and the idea that money should not be unlimited.
Related Post: Bitcoin Is Here to Stay
Only 21 million Bitcoins will ever be created. How can this be confirmed? It’s 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.
In theory, that’s true ... yet every Bitcoin must be mined using a rigorous cryptographic process.
- It’s far more stringent than the way the Fed creates an unlimited supply of U.S. dollars.
The Central Bank of the Russian Federation (a.k.a. the Bank of Russia) operates under the same principles using rubles. The value is based on trust.
On Tuesday, the ruble fell to a record low against the U.S. dollar.
At one point, the currency was down 30%, before the 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 are not waiting for a repeat performance.
On Monday, trading volume surged in Tether (USDT), a so-called stablecoin that is backed by the U.S. dollar.
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.
All this information leads me to one great way for investors to look to play the continued rise of crypto ...
MicroStrategy: A Savvy Crypto Play
I like to refer to MicroStrategy (MSTR) as the mullet of tech businesses.
Up front, it is all business. The company is a profitable, buttoned-down enterprise software company.
In back, however, the firm is pure party. It’s a leveraged Bitcoin investment. The company, based in Tysons, Virginia, now holds a whopping 125,051 Bitcoins.
CEO Michael Saylor decided in 2020 that owning Bitcoin would create more shareholder value than holding cash. Then he got even more aggressive and started raising debt to buy even more Bitcoin.
Related Post: The New War Is Digital
The average cost of a Bitcoin acquired by MicroStrategy is $30,160.
At a current value of around $44,011, the value of the company’s 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 essentially 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 seminal development. Apart from the horrific human costs, it’s 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 ... and it carries a lot of risk.
Remember: Always do your own due diligence before buying anything.
However, investors looking for a riskier Bitcoin-leveraged play should consider adding exposure into weakness.
Best wishes,
Jon D. Markman
