Michael Saylor, the Executive Chairman of MicroStrategy, stirred discussions in the Bitcoin community last week when he addressed the issue of proof-of-reserves (PoR) at an event linked to the Bitcoin 2025 conference in Las Vegas. In response to inquiries about the company’s Bitcoin holdings, which amount to approximately 580,250 BTC—valued at around $62.8 billion—Saylor rejected the concept of proving the company’s reserves. He argued that such measures could potentially weaken the security of custodians, exchanges, and investors alike.
Saylor metaphorically compared the disclosure of proof of reserves to making public the private details of one’s family, suggesting that it invites undue risk to stakeholders. His remarks have drawn comparisons from some observers to former CEO Sam Bankman-Fried of the fallen cryptocurrency exchange FTX, wherein the term proof of reserves gained prominence following a tumultuous year in which trust in cryptocurrency exchanges was severely tested. Critics have drawn parallels between Saylor and Do Kwon, who led the ill-fated Terra blockchain project before its collapse in 2022. This raises the question: does Saylor’s resistance to adopting a proof-of-reserves framework carry similar risks?
Proof-of-reserves was first proposed in response to the collapse of the Mt. Gox exchange in 2014, which resulted in the loss of approximately 850,000 BTC due to a combination of hacking and mismanagement. This event prompted a push for some form of transparency in custodial institutions to instill confidence in users. Subsequent crises, such as the collapse of FTX and other cryptocurrency firms in 2022, have heightened calls for greater scrutiny and accountability in the financial practices of cryptocurrency exchanges.
When custodial institutions, such as exchanges, hold a certain amount of Bitcoin, they create a liability to users equal to that amount. However, many institutions aim to boost their appeal by offering crypto-backed loans and yield-generating products that can dilute the liquidity of the assets held. The example of BlockFi—another company that faced bankruptcy in 2022—serves as a cautionary tale illustrating how this dilution can jeopardize customers’ ability to retrieve their funds, particularly during market downturns.
Despite the industry-wide impetus for proof-of-reserves disclosures in 2022, inherent issues have surfaced with this approach. The utility of proof-of-reserves becomes questionable in a system like fractional reserve banking, which cannot accommodate mass withdrawals from all customers. Institutions like the Federal Deposit Insurance Corporation (FDIC) evaluate financial stability based on both assets and liabilities but are nevertheless unable to ensure the availability of all client funds in emergencies.
Bitcoin, in contrast, operates through a decentralized ledger system, offering visibility into all transactions and balances. Though not designed to include a formal proof-of-reserves mechanism, the transparent nature of Bitcoin’s blockchain allows for external audits provided entities verify their holdings through cryptographic methods. However, challenges persist in ensuring that custodians truthfully represent their Bitcoin assets.
There are strategies in place that could lead to manipulation of reserves, such as a custodial entity temporarily borrowing Bitcoin to improve its reserves before an audit—a tactic that would require randomization for audits to be effective. Additionally, snapshots taken for proof-of-reserves might not accurately reflect ongoing liquidity since they only depict a single moment in time.
These complications are compounded by the lack of standardized practices regarding proof-of-reserves, which allows exchanges to selectively disclose information, utilize varying evaluation methods, or withhold essential details. This environment can diminish the overall reliability and credibility of the proof-of-reserves process.
MicroStrategy operates in a distinct arena when compared to cryptocurrency exchanges. As a publicly traded company, it is subject to stringent regulatory requirements, including the necessity to file regular reports detailing its financial standing. Its quarterly 10-Q and annual 10-K filings, along with unscheduled Form 8-K submissions, maintain a level of transparency concerning its assets, liabilities, and equity holdings. Such obligations extend beyond mere corporate governance and underline the importance of accountability to shareholders.
However, Saylor’s hesitation to disclose Bitcoin wallet addresses highlights a significant concern: going public with this information could expose the company to additional risks without any legal obligation to do so. In fact, such transparency could open the door to potential scrutiny and hacking, as well as misinterpretation of on-chain activities. If MicroStrategy were to disclose wallet addresses, it might be viewed as undermining custodial best practices.
The overarching objective for MicroStrategy remains consistent: to raise capital through selling new shares to fund further Bitcoin acquisitions, which are viewed as a strategically valuable, appreciating asset. The company’s ambitious “21/21” plan aims to raise $42 billion by 2027 through both equity and fixed-income offerings. Recently, MicroStrategy launched the Series A Perpetual Strike Preferred Stock, which offers an 8% cumulative annual dividend, alongside another instrument called Series F, providing a 10% quarterly dividend.
The yields from these financial instruments signal a strategy to dilute shares in order to invest in Bitcoin while simultaneously offering investors a lower-risk exposure to the asset class. This strategy resonates particularly well with institutional investors who may be hesitant to navigate self-custody and risk management directly, thereby favoring a regulated vehicle such as MicroStrategy’s stock.
Saylor has previously stated that even a substantial decline in Bitcoin’s value would not threaten the company’s stability, as he affirmed in an interview with the Financial Times. He noted, “Bitcoin could fall 90% and stay there for four or five years, and we would still be stable.” This perspective is reassuring not only for shareholders but also for those closely monitoring the evolving cryptocurrency landscape.
Ultimately, while the potential for Bitcoin volatility poses a valid concern, the eclectic discourse surrounding proof-of-reserves as applied to MicroStrategy appears to conflate distinct categories. The anxieties stemming from last year’s losses in the cryptocurrency market, while justified, may misdirect focus onto Saylor’s position rather than addressing the broader systemic vulnerabilities facing the industry.
This ongoing debate around proof-of-reserves and the responsibilities of custodians brings to light important questions about transparency, security, and the future of digital finance. As the financial landscape evolves, it is critical for stakeholders to remain vigilant in assessing the risks and dynamics of cryptocurrency investment strategies. Would the implementation of proof-of-reserves enhance trust, or does it risk exposing custodians to undue vulnerability? Join the conversation and share your thoughts on the implications of these discussions as they unfold.