Historical Analogies: The Hunt Brothers and Silver vs. Michael Saylor and Bitcoin

During their recent episode, Taylor, Carlisle, and Gwen Hofmeyr discussed Historical Analogies: The Hunt Brothers and Silver vs. Michael Saylor and Bitcoin. Here’s an excerpt from the episode:

Jake: Yeah. Break the streak. So, we’re going to go on a little journey together. Our story starts where many wild stories begin, which is Texas.

[laughter]

Jake: A land of oil wealth larger than life characters that could fill a hit TV show. If you ever watch Dallas, you might be familiar with a famed Texas family called the Hunt’s.

H.L. Hunt, the patriarch of this story, was born in 1889, the youngest of eight, on a farm in Illinois. He was homeschooled, never attended a day of school, traditional school, in his life. He later said that education is an obstacle to making money. He proved himself right as he became one of the richest oil tycoons of his time. And in fact, H.L. Hunt was the inspiration behind the character of J.R. Ewing in the show, Dallas, which, if you’re old enough like Toby and I, then you might remember that one. [chuckles]

So, H.L. had 15 children from three different wives. One of his sons, Lamar, actually founded the American Football League and was the creator of the Super Bowl. So, that’s some little fun American trivia. But two of his other sons, Herbert and Bunker, are famous for other reasons that we’ll get into.

Aside from oil, the Hunts were also passionate equestrians. They own one of the largest collections of Arabian horses in the world. And of course, they live these lavish lifestyles that you might expect of raging parties, and rare wines, and gourmet foods and you name it. So, think like Texas meets The Great Gatsby.

As we know, the 1970s were a decade of inflation and oil crises. During that time, two of the Hunt brothers, Herbert and Bunker, they engineered one of the most audacious financial moves in history when they decided to try to corner the silver market.

Now, this all started innocently enough. Silver, at that time, was priced around $1.50 an ounce. The Hunts believed at that time, like a lot of people, that inflation would erode the value of the US dollar, and they believed silver was a great hedge to protect their wealth. And so, they innocently started out buying silver for that reason. They kept buying, and buying and buying until they’d amassed around 200 million ounces of silver.

They had about a third of the world’s non-government owned supply of silver, and actually, like more than any other government. And of course, prices naturally skyrocketed from all of this, the Hunt demand and they hit it hit $50 an ounce. So, a $1.50 to $50 by early 1980. Things are looking good. Like, their cost basis from the early purchases is well below $50.

Everyone else’s stock and bond portfolios are getting killed by inflation. It’s a bloodbath. These guys are geniuses. Like any genius, you’re tempted to press your advantage and you start buying on leverage. I think everyone knows where this is going, but this is a tragedy, [chuckles] not a hero’s journey.

The other shoe eventually drops. What actually happened was, in 1980, the US government, through the Commodity Futures Trading Commission, they stepped in and they raised the margin requirements. They essentially forced the Hunt’s to have to sell to meet all these sudden margin calls. And so, naturally, the market was flooded due to their force selling, prices tanked further margin calls, this whole beautiful spiral goes in reverse. They had no choice but to declare bankruptcy, and they evaporated a vast fortune.

Their actions destabilized the global silver market, led to all kinds of lawsuits, legal settlements and actually widespread personal vilification in the media about them. And so, now, they’re broke and they’re pariahs. It’s quite the cautionary tale. Bunker made a brief comeback to wealth. He discovered and had taken title to these oil fields in Libya. But then, apparently, Muammar Gaddafi nationalized those properties, and so that went away as well. So, this poor guy.

Anyway, let’s fast forward today, and is there anything in history past that might rhyme today. So, this fellow named Michael Saylor is the founder of MicroStrategy, which is a business intelligence software company. He started in 1989. He rode the tech wave all the way up and all the way down, has kept grinding at it. But he’s back in the limelight today now due to he has a big bet on a single asset, bitcoin, in this case, not silver.

Much like the Hunts, he believes in the power of bitcoin to protect against inflation and profligate governments. This is the same thesis that the Hunt started out with. They were trying to protect from inflation. Saylor’s called bitcoin, a digital gold and a way to hedge. Sure. Fair enough.

So, in 2020, he started making this bold bet. He began buying bitcoin. Not just a little bit. I looked as of yesterday, he had I think 402,000 roughly bitcoins. Their average purchase price is 58,000 per bitcoin. That’s a $23 billion tab that he’s used to purchase bitcoin. At today’s market, call it 96, 000 per bitcoin, that’s $38 billion in assets. The market cap of MSTR is $90 billion’ish. And so, the market is pricing these bitcoin at more than double the NAV that they’re at today.

Now, does that make any sense? Well, why not just buy bitcoin directly instead of paying 2x the price of bitcoin to acquire one share, look through share of bitcoin through MSTR? Well, first, I’m sure figuring out the wallets and all that stuff’s a pain. It’s a lot easier to just throw MSTR into your Robinhood app. Second, just like the Hunts, Saylor has been using debt to fund some of his bitcoin purchases. That’s somewhere, I think, around $5 billion worth of debt that they’ve taken on. That might be a little bit of an old number, because I know they’ve been doing even more stuff, and it makes my brain hurt to follow it along too closely.

And then, on top of that, why would you buy just regular bitcoin in your wallet when you can get it with leverage through a corporate structure, right? That is even better. And of course, why just buy it in the regular old structure when you can buy it in an ETF that’s a single stock ETF that’s also levered up to buy bitcoin? Boy, it’s basically like leverage turtles all the way down in this.

Basically, Saylor is betting that more institutions and countries might adopt bitcoin. This demand will, of course, then cause the price to skyrocket. He’ll continue to look like a genius. He can keep issuing equity at these crazy– Well, that’s a judgment term, crazy, at these current prices.

Tobias: Elevated?

Jake: Elevated, perhaps. Higher than before. Shoot. To be honest with you, I have no idea. He might be right about this. Like, this thing could go on forever. I don’t really know how to handicap the odds of human interest waxing and waning in something like this. It seems really hard to underwrite to me.

But I did wondering, if we look at that analog or that historical comparison with the Hunt brothers, like what was the thing that tripped them up, it was leverage, plus regulatory curveball that destroyed the Hunt brothers. So, it’ll be interesting to see we’re all going to find out together if something similar happens to Saylor and MicroStrategy, if perhaps there’s a government. I know it’s a decentralized network. Don’t send me messages. But if government somehow finds a way to throw a perfectly good stick into his bicycle tire, this thing’s just going to the moon.

Tobias: Is the business of MicroStrategy big enough to support the $5 billion in debt?

Jake: Oh, I don’t think so. I think it is loss making.

Tobias: So, what are the lenders thinking there? They’ve got collateral against the bitcoin.

Jake: Just asset. Yeah. Bitcoin asset. Borrow against that.

Gwen: Asset based lending, it’s a risky practice.

Tobias: But are they linked to the other– Is the debt actually secured against the bitcoin, or is it–

Jake: Toby, I’m not going to go read the docs.

Tobias: Yeah. No, neither am I. I know you don’t know the answer.

Jake: Even if it is– [crosstalk]

Tobias: Bitcoin has been a volatile asset historically, and it has gone up and down. I remember 2020, when it was $20,000 for the first time, having started the year, one or something like that. And then, I think in the interim, it got down to three. So, if it goes, $98,600, which I don’t know what– I think it almost got to the 100 grand.

Jake: Yeah.

Tobias: If it backs up to $33, that’s below his cost, below the net debt, and it can’t service the loan. And then, you got the two by leave it on top of that could trade at a discount to its holdings. I don’t know, it’s not a sure thing. It’s not a lay down. It’s not over yet. Anything can happen. Good luck to everybody playing that one.

Jake: Yeah.

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