Proof-of-Reserves: Is it relevant for MicroStrategy?

The following is a guest post and analysis from Shane Neagle, Editor In Chief from The Tokenist.

On Tuesday, Michael Saylor, the Executive Chairman of MicroStrategy (NASDAQ: MSTR), stirred up the Bitcoin segment of the internet. During an event linked to the Bitcoin 2025 conference in Las Vegas, Saylor was questioned about whether the company (now rebranded as Strategy) intends to disclose proof-of-reserves for its Bitcoin holdings, which currently amount to 580,250 BTC (~$62.8 billion).

In response, Saylor clearly expressed his disapproval of the concept, stating that:

“It actually dilutes the security of the issuer, the custodians, the exchanges and the investors. It’s not a good idea, it’s a bad idea. It’s like publishing the addresses and the bank accounts of all your kids and the phone numbers of all your kids. And then thinking, somehow, it makes your family better.”

Numerous influencers have already drawn parallels between this sentiment and that of Sam Bankman-Fried. The term proof-of-reserves (PoR) gained traction during the downfall of his FTX crypto exchange, which led Binance, the largest crypto exchange globally, to establish its own PoR system in late 2022.

Others have also compared Saylor to Do Kwon, who led the failed Terra (LUNA) blockchain project, which was supported by algorithmic stablecoins, yields, and Bitcoin reserves. Given the significant number of crypto bankruptcies in 2022, caution is warranted, but is Michael Saylor’s position as concerning as some suggest?

Proof-of-Reserves Origin

Prompted by the collapse of the Mt.Gox exchange in 2014, proof-of-reserves (PoR) was initially proposed as a method to foster trust in custodial entities. While Mt.Gox is widely recognized for a hack that resulted in the loss of up to 850k BTC from hot wallets, the exchange also suffered from mismanagement beyond technical security issues.

Specifically, Mt.Gox CEO Mark Karpeles was found guilty of manipulating the exchange’s records to inflate the company’s reported holdings, receiving a 2.5-year sentence that was suspended for four years in early 2019. Following the tumultuous year of 2022 for the crypto industry, exchanges were eager to restore confidence.

Using the example of the collapsed BlockFi, the risks associated with asset holding reveal a consistent pattern:

If a custodial entity possesses 1 BTC, it creates a liability for the user for that 1 BTC. In contrast, in a self-custodial situation, the user would create their own liability.

But what if the custodial entity seeks to enhance its appeal?
In that case, the users’ assets could be leveraged to provide crypto-backed loans and yields on savings accounts.

This would imply that the ideal 1:1 redemption liquidity would be extended to other parties. In BlockFi’s case, this was Three Arrows Capital (3AC).

If liquidity is diluted, the original depositor can no longer rely on receiving their 1 BTC consistently across all market conditions.

This scenario initiated a PoR race in 2022, aiming to clarify which types of assets are covered, to what extent, how frequently they are audited, and by whom.

Image credit: Nic Carter at niccarter.info

However, even shortly after the FTX collapse, as Binance rushed to disclose its PoR, it became evident that there are inherent challenges with this method.

PoR Usefulness

In the global framework of fractional reserve banking, it is impossible to redeem all funds if all clients of the banks were to suddenly attempt withdrawals. Nonetheless, institutions that oversee banks, such as the FDIC, consider both their assets and liabilities to assess their overall solvency.

Moreover, the central bank acts as the lender of last resort (LOLR), capable of electronically adding funds to the bank’s balance sheet. This was evident in early 2023 during the regional banking crisis in the US, when Bitcoin experienced its first significant rally following the dismal year of 2022.

This occurred because Bitcoin, as a digital ledger open to public examination, possesses inherent transparency. Each unit of its 21 million supply is documented, supported by computational proof-of-work power. While Bitcoin does not inherently feature a Proof of Reserves mechanism, the visibility of balances and transactions allows for external PoR audits when entities sign messages from their addresses.

If BTC addresses can be reliably associated with specific holders, further understanding of asset ownership and distribution becomes feasible. The challenge lies in verifying whether entities holding BTC possess the amounts they claim. There are several methods by which this can be manipulated:

• Before PoR attestation, the custodial entity could inflate reserves by temporarily borrowing assets. Thus, audits would need to be randomized.
• A PoR snapshot does not guarantee 1:1 reserves until the subsequent snapshot.

Ultimately, PoR audits lack standardization, creating a space where exchanges can selectively reveal information, employ varying methodologies, or omit crucial details, thereby undermining the consistency, transparency, and reliability of the proof-of-reserves process.

Where Does MicroStrategy Fit In?

As noted, MicroStrategy is not a crypto exchange but a publicly traded company that combines software development with more traditional web3 elements. Consequently, the company is required to submit quarterly (10-Q) and annual (10-K) reports. Additionally, publicly traded companies must file Form 8-K for unscheduled events and changes that impact shareholders’ interests.

This information is readily accessible through the SEC’s EDGAR system. In essence, Strategy already operates within a regulated environment with specific expectations. These include auditing their liabilities, assets, and equity holdings in the aforementioned reports, along with acquisition costs and impairments.

However, Strategy would be out of compliance if it were to suddenly disclose BTC wallet addresses, for which there is no obligation. Conversely, Strategy could face liability and erode trust if on-chain activity became a target for scrutiny, misinterpretation, and hacking attempts.

Furthermore, if Strategy’s BTC holdings are stored in cold storage or multi-signature wallets, which is likely, public disclosure of wallet addresses would contravene custodial best practices that are also regulated. In summary, by doing so, Strategy would be viewed as a very unserious company.

What Is Strategy’s Overall Target?

Strategy’s primary objective remains unchanged – to raise capital by issuing new MSTR shares to acquire more Bitcoin, viewed as an appreciating asset due to its fixed scarcity. As of Q1 2025, Strategy reported 65% completion of this “21/21” plan to raise $42 billion.

Raising $21 billion in equity and $21 billion in fixed-income between 2025 to 2027. Image credit: MicroStrategy

To entice investors, Strategy introduced Series A Perpetual Strike Preferred Stock (STRK) with an 8% cumulative annual dividend. Starting June 30th, STRF is another perpetual preferred stock offering a 10% dividend, payable quarterly. Beyond providing higher yields, STRF is also non-convertible, representing a riskier income option that could reach up to 18%.

In other words, these are yields for diluting shares to purchase Bitcoin. Investors would opt for MSTR shares instead of Bitcoin itself because demand creates a premium to its net asset value (NAV). It is also important to note that many investors prefer not to handle self-custody or contemplate risk management, which is why MSTR, a regulated stock on NASDAQ, serves as an appealing Bitcoin proxy.

Ultimately, Michael Saylor is not generating new Bitcoin and is not overleveraging to the extreme extent observed with SBF or Do Kwon. In an interview with the Financial Times, he remarked that “Bitcoin could fall 90% and stay there for four or five years, and we would still be stable,”

The Bottom Line

It is possible that, for some reason, Bitcoin could plummet during the era of institutional adoption and Strategic Bitcoin Reserve. Consequently, MSTR stock would also decline.

However, such a scenario would be distinctly separate from concerns regarding Strategy’s proof-of-reserve, whether it would be embraced as a strategy or dismissed as a liability. Ultimately, the significance of PoR as it pertains to Strategy appears to be a conflation of categories.

Or rather, it seems that the justified energy derived from the harsh lessons of 2022 is misdirected.

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