Written by: flowie, ChainCatcher
Editor: Nianqing, ChainCatcher
Last week, after founder Michael Saylor announced that Microstrategy's (NASDAQ: MSTR) ultimate goal was to become the leading "Bitcoin bank", MSTR surged nearly 16% last Friday, breaking through $212 (temporarily falling back to $194), and its market value soared to $43 billion, a record high.
Since Microstrategy launched its Bitcoin investment strategy in August 2020, MSTR has risen by more than 1,600%, outperforming BTC and major S&P 500 technology stocks such as Nvidia.
This year, MSTR has significantly outperformed BTC. According to market data:
Year to date, BTC is up 52%, MSTR is up 180%,
In the past 30 days, BTC has risen by about 7.41%, while MSTR has risen by 44%.
MicroStrategy's "lying down and making money" model has also attracted more imitators. Since Metaplanet, a Japanese listed company, started its Bitcoin investment strategy in April, its stock price has risen by 480%. Recently, Samara Asset Group, a German listed company, will also issue 30 million euros of bonds, part of which will be used to purchase Bitcoin.
Why can a listed company "win" by simply holding a large amount of BTC? What risks does the MicroStrategy model have?
Borrowing money to buy Bitcoin, MicroStrategy's "lying and making money" model
MicroStrategy's original main business was enterprise-level AI software, which contributed about $100 million in revenue each quarter. As a US-listed company, this part of the business was very mediocre.
It was not until August 2020 that MicroStrategy started its Bitcoin investment strategy and started buying Bitcoin crazily. MicroStrategy's stock price started to rise sharply. MicroStrategy's market value grew from $600 million to more than $40 billion.
Therefore, many people, especially users in the crypto community, have the impression that MicroStrategy is just a listed company that continues to increase its holdings of Bitcoin. Investing in MicroStrategy is also indirectly equivalent to investing in BTC.
But MicroStrategy co-founder Michael Saylor believes that the market has misunderstandings about MicroStrategy, and most people actually don’t know what they are doing?
Last week, MicroStrategy co-founder Michael Saylor restored the thinking logic behind MicroStrategy's Bitcoin strategy in a conversation with Bernstein analysts. He clearly defined MicroStrategy's model and positioning, and why it can outperform BTC and beat major S&P 500 technology stocks including Nvidia.
Simply put, MicroStrategy's Bitcoin investment strategy is not to simply buy Bitcoin and hoard it, but to borrow money to buy Bitcoin by issuing bonds and creating a leverage effect.
Michael Saylor said that MicroStrategy is currently borrowing money to buy Bitcoin at almost zero interest (0.625% interest in the last two times), or issuing shares at a 60% or 100% premium to Bitcoin, and then buying back Bitcoin.
For example, in September this year, MicroStrategy completed the issuance of US$1.01 billion convertible notes with a coupon rate of 0.625% and a conversion premium of 40%.
The cost of debt is relatively fixed, while the value of Bitcoin assets has increased, and MicroStrategy has arbitraged between the legal capital market and the digital capital market by investing in digital capital with a return that is many times higher than the cost of capital. Michael Saylor This is why MicroStrategy has outperformed all 500 companies in the S&P index and Bitcoin.
This arbitrage model also increases net profit and improves stock value. According to MicroStrategy's Q2 financial report, MicroStrategy introduced a new accounting standard, namely BTC yield, to describe the investment value of MSTR. This year, MicroStrategy's BTC yield has reached 17.8%, which means that 1 BTC invested through MicroStrategy has reached 1.178 BTC. This is why MSTR's stock price has outperformed Bitcoin.
Michael Saylor said that MicroStrategy has now developed into a Bitcoin securitization company.
In addition to MicroStrategy shares, which offer 1.5x volatility exposure to Bitcoin, MicroStrategy also has various derivatives such as MSTX and MSTU, which offer 3x leverage, and the MSTR options market, which offers 10x or 20x leverage.
MicroStrategy will also explore the fixed income market in the future and consider issuing preferred shares. To some extent, MicroStrategy is eroding the stock market, option market, convertible note market, and fixed income market.
Is it a perpetual motion machine or the US stock market "Luna"?
MicroStrategy's model seems simple. However, for a listed company, by holding BTC and using clever mathematical calculations, it does not need to maintain a large team, and its stock price can rise faster than that of technology companies that sell software, data, AI, etc. Whether there are loopholes and risks behind this has also become a focus of debate in the crypto community.
Overseas KOL Glenn Hodl believes that MicroStrategy has found a "perpetual motion machine" version of the growth model.
Gelnn said that even if the price of Bitcoin stops growing, Microstrategy can use the differences in the market's valuation patterns for commodities and companies to create a "perpetual motion machine" that can sustainably increase its own market value, which will eventually make Microstrategy the world's largest company by market value.
Crypto KOL @CryptoPainter_X also believes that MicroStrategy’s current model is indeed an “infinite funding loophole.” “If MSTR’s market value can be 10 times larger, then in theory its stock price can be raised to an infinitely high level in sync with the price of BTC... If its stock market value is high, each share expansion financing will receive a lot of funds, realizing a true perpetual motion machine.”
But can MicroStrategy really borrow unlimited debt to have unlimited ammunition to buy Bitcoin? Is there a risk of liquidation after Bitcoin falls?
Michael Saylor said MicroStrategy has no restrictions and can borrow unlimitedly, and it will not be a problem to raise another $100 billion, $200 billion or even $1 trillion.
As for the future cold capital market, will MicroStrategy have enough cash to pay interest and repay debts to prevent the risk of liquidation? Michael Saylor is also very optimistic.
On the one hand, based on his confidence in Bitcoin, Michael Saylor believes that the MicroStrategy model will not work unless Bitcoin's yield is always 0 and its volatility must also be 0.
On the other hand, MicroStrategy now has minimal interest expenses, and MicroStrategy can continue to deleverage by building permanent Bitcoin capital. Michael Saylor said, "We are not doing one thing overnight, but gradually deleveraging back and forth."
According to MicroStrategy's Q2 financial report, MicroStrategy holds 226,500 BTC, worth approximately $15 billion, while its debt is approximately $1.45 billion, with a debt ratio of 10%.
Michael Saylor also mentioned that MSTR’s liquidation line is when BTC is below $700. At present, the probability of this happening is not high.
Crypto analyst @Phyrex_Ni also believes that the loan ratio is relatively low, there is not much capital leverage, and MSTR's BTC is not at risk of liquidation. "Even if it is below $700, MSTR has many ways to repay these loans without closing the positions."
But crypto KOL @lindazhengzheng has doubts about this. He believes that MicroStrategy is similar to the LUNA model and will also be trapped in a death spiral. "If the price of BTC plummets, its value as collateral for MSTR will decrease. Then MSTR's stock price and bond prices will fall; in extreme cases, when old bonds mature, buyers will no longer buy new bonds, and there will be no new liquidity entering the market; and the company may not have enough money to repay old debts, which will cause the stock price to fall further."
@CryptoPainter_X also believes that there is no real "spiral ascending" or "left foot stepping on right foot" in this world. "If you Google the financial fraud of Enron, you will find that the Ponzi cycle will eventually end."
It is worth mentioning that MicroStrategy was fined $8.5 million by the SEC for financial fraud in 2000, causing its stock price to plummet 62%. Saylor personally lost $6 billion in wealth in one day.
In addition, even without the risk of liquidation, MicroStrategy has 1.5 times the volatility exposure of Bitcoin. When BTC rises, MSTR rises more than BTC, but when BTC falls, MSTR also falls more. Holding MSTR is still risky.
What will be the impact of the massive entry of cloned versions of “MicroStrategy”?
MicroStrategy's strategy has no threshold. Michael Saylor also said that any listed company can copy the strategy - first buy Bitcoin, then issue shares at a premium to Bitcoin, and then issue bonds with Bitcoin as collateral.
Michael Saylor also believes that “buying Bitcoin will eventually become the basic strategy for all other companies.”
In fact, the surge in MicroStrategy’s stock price this year has indeed made listed companies FOMO and follow suit. Many companies, including Japanese-listed Metaplanet, US-listed medical company Semler Scientific, and German-listed Samara Asset Group, have started the “MicroStrategy” Bitcoin investment model.
In addition, according to Blockworks statistics, the frequency of corporate purchases of Bitcoin has increased significantly this year, reaching 32 times as of September 30, far exceeding the 9 times in the whole of last year; MicroStrategy, Block, Metaplanet, Semler Scientific, OneMedNet and British football club Real Bedford FC have purchased nearly 50,000 Bitcoins in total.
The cloned version of "MicroStrategy" entering the market in batches to buy BTC should boost BTC's rise in the short term. Crypto KOL @lindazhengzheng believes that "if too many listed companies use the Microstrategy model in this round, BTC's second wave of new highs will come earlier and rise higher, but it will also move faster and fall more severely."
As mentioned earlier, the MicroStrategy model still has risks, and danger may be coming at an accelerated pace. Although the MicroStrategy model seems to have no threshold, the cost of purchasing BTC for listed companies that enter the market later is much higher than that of MicroStrategy, and they may also lack the ability to manage risks in this model.
@lindazhengzheng analyzed that what is scary is that the chain of bankruptcies of listed companies has made it difficult for the price of Bitcoin to support, leading to a Lehman Brothers moment where the bull market turns to the bear market.
