Author: Climber, Golden Finance
In about 20 years, people will look back and say, “Where were you during the digital gold rush?” — Michael Saylor
Recently, MicroStrategy has once again become the focus of market attention due to its plan to increase its Bitcoin investment by $42 billion, and its market value has successfully surpassed Coinbase due to the rise of Bitcoin.
MicroStrategy has continued to buy Bitcoin since Q3 2020, and in the past year the company has also sold convertible preferred notes. Since the crypto market crashed two years ago, MicroStrategy Inc. has outperformed almost all major U.S. stocks, including Nvidia Corp, a benchmark in the AI industry.
Driving its skyrocketing gains was an unconventional decision made four years ago by co-founder and chairman Michael Saylor to buy Bitcoin as a hedge against inflation, a strategy that transformed the little-known enterprise software company into the world's best-known crypto hedge fund proxy.
Michael Saylor and his team also created the concept of "BTC yield", which MSTR considers as a key performance indicator (KPI) to describe the company's performance in acquiring Bitcoin in an accretive manner. The BTC yield in the third quarter was 17.8%. Recently, the company raised the target range of "BTC yield" from the previous 4%-8% to 6%-10%.
Michael Saylor personally claims that he holds more than $1 billion worth of Bitcoin.
2. Buy Bitcoin in full: the biggest win-win
On October 31, MicroStrategy proposed the "21/21 Plan" with a total investment of up to $42 billion. That is, the company will conduct $21 billion in equity financing and $21 billion in bond issuance in the next three years, and use the additional capital to purchase more BTC as a financial reserve asset to achieve higher BTC returns.
MicroStrategy has purchased Bitcoin every quarter since Q3 2020, and the company holds a total of 252,220 BTC to date.
In order to raise funds to purchase Bitcoin, MicroStrategy used a variety of channels, such as convertible notes, stock splits, leveraged ETFs, etc.
In September this year, MicroStrategy bought 18,300 bitcoins for about $1.11 billion in cash, at an average price of about $60,408. Since then, the company has purchased 7,420 bitcoins for $458.2 million, at an average price of about $61,750. At the current BTC price of about $72,000, the company's bitcoins are worth more than $18 billion.
The company raised a total of $2.1 billion in the third quarter through the sale of equity and debt, and $800 million in the three months ended June 30.
1. Convertible Senior Notes
MicroStrategy has launched convertible senior notes several times, using the net proceeds from the sale of the notes to purchase Bitcoin. These notes are MicroStrategy's unsecured senior debt and will bear interest.
The notes will also be convertible, at MicroStrategy's option, into cash, shares of MicroStrategy's Class A common stock, or a combination of shares of MicroStrategy's Class A common stock and cash.
On September 17, MicroStrategy announced plans to privately issue $700 million in aggregate principal amount of convertible senior notes due in 2028 (the "Notes") to qualified institutional buyers under the Securities Act of 1933. The company then announced that it would increase the convertible senior notes to raise $875 million.
Throughout September, MicroStrategy completed a total of $1.01 billion in convertible notes issuance at a coupon rate of 0.625% and a conversion premium of 40%.
In June of this year, MicroStrategy also announced the issuance of $500 million in unsecured senior convertible notes to purchase more Bitcoin, and raised the offering price to $700 million a day later. Immediately afterwards, MicroStrategy completed the issuance of $800 million in convertible notes at a 2.25% coupon rate and a 35% conversion premium.
In March this year, MicroStrategy also issued convertible senior notes of US$525 million and US$800 million respectively.
In addition, MicroStrategy is proposing to grant the initial purchasers of the notes an option to purchase up to an additional $75 million in aggregate on and within 13 days of the date the notes are first issued.
Michael Saylor once wrote that the company used the proceeds from convertible notes and cash to purchase an additional 9,245 bitcoins, approximately US$623 million, with an average price of approximately US$67,382 per bitcoin.
2. Equity sale and split
Stock splits are more common among public companies whose share prices have appreciated significantly. The split does not change the company's valuation, but in the case of many retail-oriented trading platforms that offer fractional shares, it may make it psychologically easier for smaller retail investors to buy the stock by lowering the share price.
For example, chipmaker giant Nvidia recently carried out a 10-to-1 stock split after its share price reached four figures and its share price had tripled in a year, driven by the rise of the artificial intelligence (AI) sector.
In August this year, MicroStrategy announced that it was seeking to sell its Class A shares to raise up to $2 billion to buy more Bitcoin. However, in the regulatory documents submitted to the US SEC, MicroStrategy did not disclose the timetable for stock sales or how much proceeds would be used to buy Bitcoin.
In July, MicroStrategy announced a 10-for-1 stock split that will make the company's stock more accessible to investors and employees.
3. Leveraged ETFs
On August 15, the SEC approved the first leveraged long MicroStrategy ETF. Asset management company Defiance ETFs also launched the first leveraged MSTR ETF that month.
Rivals REX Shares and Tuttle Capital Management followed in September with more leveraged products, kicking off what Bloomberg ETF analyst Eric Balchunas called a “hot sauce arms race.”
On September 28, the leveraged MicroStrategy (MSTR) exchange-traded fund (ETF) surpassed the $400 million mark in net assets for the week as retail investors continued to flock to this extremely volatile Bitcoin ETF.
As an ETF, BlackRock's Bitcoin Trust carries an expense ratio of 0.25%, while MicroStrategy charges no such fees to shareholders. MicroStrategy benefits from the revenue generated by its analytics business, providing financial stability beyond its Bitcoin holdings. MSTR has the ability to raise capital through debt and equity offerings, while IBIT relies on direct investor inflows.
MicroStrategy's successful model has also strengthened other institutions' confidence in Bitcoin. For example, in August, Bitcoin mining company Marathon Digital recently sold $300 million in convertible notes to purchase 4,144 bitcoins; South Korea's National Pension Service (NPS) invested in Bitcoin through MicroStrategy.
3. Huge hidden worries: leverage and bubbles
MicroStrategy founder Michael Saylor has publicly stated that four years after adopting the Bitcoin strategy, MicroStrategy has outperformed every company in the S&P 500 index. In fact, since 2020, BTC prices have continued to rise and continue to hit record highs. This has also brought high returns to MicroStrategy, and the company currently has $8.4 billion in unrealized profits on Bitcoin.
In July this year, Michael Saylor said at the Bitcoin 2024 conference that by 2045, Bitcoin will rise to $13 million, $49 million in a bull market, and $3 million even in a bear market. In addition, he also said that Bitcoin adoption will enter a high-growth phase from 2024 to 2028.
It is precisely because of the confidence in the long-term future of Bitcoin that MicroStrategy has chosen to continue to increase its investment in Bitcoin. There are also different voices in the market regarding MicroStrategy's "All In BTC" behavior.
The CEO of Two Prime Digital Assets believes that MicroStrategy's plan to raise $42 billion to acquire more Bitcoin is a "win-win". More and more investors are considering how to invest in Bitcoin in the event of further depreciation of the US dollar, which is one of the reasons for the recent strength of Bitcoin prices, which may stimulate more institutional interest in Bitcoin and related investments.
CryptoQuant CEO Michael Saylor has proven that Bitcoin is the best strategic asset for public companies. Bitcoin has risen 237% in two years, while MicroStrategy's stock price has risen 669%. Both saw similar declines during the bear market, but MSTR's rebound was three times stronger than Bitcoin.
However, some institutions have expressed concerns, especially about whether MicroStrategy will choose to sell Bitcoin due to the company's declining performance.
On October 28, Steno Research reported that MicroStrategy's Bitcoin holdings were trading at a premium of nearly 300%, but this was difficult to sustain.
Analysts say the effect of MicroStrategy's recent stock split is waning, while the launch of U.S. spot Bitcoin ETF options will reduce investor demand for the company's shares.
In addition, the report mentioned that the company's premium mostly remained below 200% during the crypto bull run in 2021. As the regulatory environment becomes increasingly friendly to Bitcoin and cryptocurrencies, investors may prefer to hold Bitcoin directly rather than MicroStrategy stock.
JPMorgan Chase has also warned that MicroStrategy's previous move to buy $2 billion in Bitcoin could exacerbate the recession. This is because the company's purchase of Bitcoin through debt has added leverage and bubbles to the current cryptocurrency craze and increased the risk of more severe deleveraging in a potential future recession.
In fact, MicroStrategy's market capitalization is trading at a huge premium to the net asset value of its underlying Bitcoin asset, with the asset premium ratio soaring to 175.08%, and the current ratio of stock market capitalization to its Bitcoin net asset value (NAV) is 3.007.
The valuation of MicroStrategy's main business is between $1.5 billion and $2.5 billion. Even if the upper limit is $2.5 billion, the market premium for MSTR's Bitcoin assets is still as high as 175.08%. This shows that investors who currently buy MSTR stocks still expect Bitcoin to increase by nearly 1.75 times, that is, Bitcoin will reach $195,000.
MicroStrategy's large holdings in Bitcoin and its high debt levels have led some market participants to question whether the company will be forced to dump Bitcoin on the market, triggering a downward spiral in prices. MicroStrategy founder and executive chairman Michael Saylor previously said he had no intention of selling the company's Bitcoin.
In response, BitMEX Research analysts said the company is highly unlikely to be forced to sell its Bitcoin holdings. If Bitcoin prices remain strong, bondholders may choose to convert to stocks, making forced sales of Bitcoin less likely. While interest payments could theoretically put pressure on MicroStrategy, cash flow from its software business should be sufficient to cover these costs without selling Bitcoin, even if prices fall.
However, in April this year, Michael Saylor made a profit of $370 million by selling company shares. In addition, MicroStrategy lost $53.1 million in the first quarter of this year. The net loss in the second quarter was $102.6 million, and the revenue in the third quarter was $116.1 million, a decrease of 10.3% from the third quarter of 2023, and about 5.22% lower than analysts' expectations.
Conclusion
There is no doubt that MicroStrategy is successful at this stage. The continuous rise of Bitcoin has brought a steady stream of investment returns to the company, and it has also increased its stake in Bitcoin through debt and leverage under positive feedback. 99% of the total amount of Bitcoin is expected to be mined before January 2, 2035. If Bitcoin can really rise as expected, then MicroStrategy may become the easiest high-market-cap company in the history of the US stock market.
However, we cannot ignore the concerns of analysts. MicroStrategy is still exposed to multiple risk factors. When the company's liquidity is tight, it may choose to sell Bitcoin. I just hope that the next black swan will not come too fast, too fierce, or too hasty.
