Article source: Golden Finance
Author: 0xjs, Golden Finance
Bitcoin breaks through $80,000! Bitcoin breaks through $90,000! Bitcoin breaks through $95,000! Bitcoin breaks through $99,000!
It is evident that Bitcoin will soon break through the $100,000 mark.
Common sense tells us that the direct reason for a significant price increase is that someone is buying heavily with real money, after all, 'Money Talks'.
In this round of the crypto bull market, there is severe differentiation among crypto tokens, with the two most outstanding sectors being Bitcoin and Solana. The rise of Solana is mainly driven by crypto players flocking into Meme, while the rise of Bitcoin is primarily funded by the US Bitcoin ETF and some listed companies, especially MicroStrategy. This article mainly focuses on MicroStrategy.
Golden Finance reporters spent an evening on November 21 exploring the documents submitted by MicroStrategy to the SEC since 2021, deeply analyzing MicroStrategy's behavior of buying Bitcoin and its funding sources. The conclusion is that MicroStrategy is an enhanced version of 'Grayscale + Luna.'
First, let's look at the overall situation of MicroStrategy, then break down the funding sources for MicroStrategy's Bitcoin purchases, and finally compare Grayscale and Luna. Here we go.
MicroStrategy is unafraid of bull and bear markets: spending over $16 billion to firmly buy Bitcoin.
Since MicroStrategy implemented its Bitcoin reserve strategy in September 2020, it has consistently executed this strategy fearlessly across cycles, such as buying Bitcoin for over $59,000 during the bull market in April and November 2021.
MicroStrategy continues to buy BTC
Golden Finance reporters have found that, as of November 22, 2024, MicroStrategy has cumulatively spent $16.58 billion to purchase Bitcoin and currently holds 331,000 bitcoins, with a market value of the held bitcoins nearing $33 billion.
Since the successful issuance of the Bitcoin ETF in January 2024, Bitcoin ETFs manage over 1.24 million bitcoins, with a total asset value surpassing $120 billion and a total net inflow of approximately $30.3 billion. Bitcoin ETFs have become investment targets for many investors, not just from a single investor.
It seems that MicroStrategy may be the single entity that spends the most on buying Bitcoin.
So the question arises, where does MicroStrategy get so much funding to buy Bitcoin?
Golden Finance reporters reviewed the reports submitted by MicroStrategy to the SEC, finding that its funding mainly comes from two sources: convertible senior notes (Convertible Senior Notes) and at-the-market equity offerings (At-the-Market Equity Offerings).
Among them, convertible senior notes (Convertible Senior Notes) are aimed at qualified institutional investors, while at-the-market equity offerings (At-the-Market Equity Offerings) directly target the secondary market.
Convertible Senior Notes: $7.26 billion qualified institutional investors
Below are the notes issued by MicroStrategy since 2020. Except for the $500 million senior secured debt issued in June 2021, the rest are convertible senior notes (Convertible Senior Notes).
Among them, the $3 billion convertible bond newly issued by MicroStrategy on November 21, 2024, can be used at any time to buy Bitcoin. Perhaps in the recent days when MicroStrategy uses this $3 billion to buy Bitcoin, Bitcoin will be breaking through $100,000.
Understanding what convertible senior notes (Convertible Senior Notes) are, you'll find that they are indeed a good financial instrument.
The so-called convertible senior notes are a special type of debt security that includes an option to convert the notes into a predetermined number of shares of the issuer's stock. If the stock rises, it can be converted into stock; if the stock price is low, interest and principal will be repaid according to the debt. Furthermore, senior convertible notes take precedence over all other debt securities issued by the same organization and can receive priority compensation. Therefore, it is a bond with high yields on top and a guaranteed bottom.
Importantly, convertible senior notes generally come with mandatory redemption clauses. After the prohibition period specified by the clauses or when the early redemption clauses are triggered, the issuer can initiate a mandatory redemption. Before the specified redemption date, investors need to convert the convertible bonds into company stock; otherwise, the issuer has the right to forcefully redeem the convertible bonds at the bond's face value plus accrued interest. In most cases, investors will actively convert them into stock.
Taking the 2025 Convertible Notes already redeemed by MicroStrategy as an example, the maturity date of the 2025 Convertible Notes is December 15, 2025. However, MicroStrategy announced on June 13, 2024, that holders of the 2025 Convertible Notes could choose to convert their notes into 2.5126 shares of MicroStrategy Class A common stock per $1,000 principal at the applicable conversion rate (reflecting a conversion price of $397.99 per share) before 5:00 PM New York time on July 11, 2024. Otherwise, MicroStrategy will forcibly redeem all outstanding notes on July 15 at a price equal to the principal plus accrued unpaid interest.
On that day, MicroStrategy's stock price was around $1,300 (MicroStrategy completed a 1:10 stock split on August 8, and the $1,300 price reflects the pre-split price), clearly making it favorable for creditors to convert their debts into stock. Creditors complete their arbitrage by obtaining stocks.
Why are institutional investors eager to purchase MicroStrategy's convertible bonds? Because the risk is minimal, essentially guaranteeing profit, and senior convertible bonds have priority claim rights. Currently, MicroStrategy's total convertible bond liabilities amount to $7.26 billion, while the market value of Bitcoin held by MicroStrategy is nearly $33 billion. Even if Bitcoin drops by 75%, MicroStrategy's convertible bond creditors will not lose money.
It can be said that the most important motivation behind convertible bonds is for the issuer to encourage investors to actively choose to convert their debt into equity, thereby allowing the issuer to avoid paying cash to repay the debt.
At-the-Market Equity Offerings: Nearly $10 billion secondary market
Here is the market stock issuance data of MicroStrategy since 2020. Over the past four years, MicroStrategy has raised a total of $9.8235 billion directly in the secondary market by issuing new shares, all of which have been used to buy Bitcoin.
The so-called at-the-market equity offering (ATM Equity Offering) refers to subsequent stock issuances by a listed company to raise funds after its IPO. In an ATM issuance, a listed company sells newly issued shares gradually to the secondary trading market through designated brokers at the current market price over a period of time. Brokers sell the issuing company's stocks in the public market to obtain cash revenue and then deliver the proceeds to the issuing company.
Taking MicroStrategy's ATM Equity Offering as an example, on August 1, 2024, MicroStrategy entered into a sales agreement (the 'August 2023 Sales Agreement') with TD Securities (USA), The Benchmark Company, BTIG, Canaccord Genuity, Maxim Group, and SG Americas Securities. According to the agreement, MicroStrategy may issue and sell its Class A common stock through sales agents, with a maximum issuance of $2 billion worth of stock. According to the 8-K document submitted by MicroStrategy to the SEC on November 11, 2024, MicroStrategy issued a total of 7,854,647 shares, raising $2.03 billion, which was entirely used to purchase 27,200 bitcoins.
On October 30, 2024, MicroStrategy announced the 21/21 plan, stating that it aims to raise $42 billion in capital over the coming year, including $21 billion in equity and $21 billion in fixed-income securities, to invest in Bitcoin. On the same day, MicroStrategy disclosed that it reached a sales agreement with TD Securities (USA), Barclays Capital, The Benchmark Company, BTIG, LLC, Canaccord Genuity, Cantor Fitzgerald & Co., Maxim Group, Mizuho Securities USA, and SG Americas Securities to issue $21 billion of MicroStrategy stock at the market price. An 8-K document submitted by MicroStrategy to the SEC on November 18 showed that between November 11 and 17, MicroStrategy sold 13,594,000 shares, raising approximately $4.6 billion, all of which was used to purchase 51,780 bitcoins.
According to MicroStrategy's plan, brokers still have about $16.4 billion worth of newly issued MicroStrategy shares available for sale.
Why is MicroStrategy considered an enhanced version of 'Grayscale + Luna'?
Now that we are familiar with MicroStrategy's 'convertible bonds' and 'at-the-market equity offerings' golden keys, reflecting on them, aren't they very similar to Grayscale and Luna from the last bull market, but enhanced?
Grayscale Vs. Convertible Bonds:
Looking back at Grayscale's operating mechanism before it transformed into an ETF, Grayscale trust shares were only issued to qualified investors, who purchased GBTC shares with off-market cash (the underlying Grayscale trust must be backed by corresponding Bitcoin assets) or exchanged physical Bitcoin for GBTC shares, locking them for 6 months before publicly trading to complete arbitrage. Meanwhile, GBTC shares are isolated from the underlying Bitcoin assets, and investors cannot redeem.
MicroStrategy's convertible bonds (Convertible Senior Notes) are also aimed at qualified investors, who buy the convertible bonds with off-market cash and convert them into MicroStrategy stock during the mandatory redemption to complete the arbitrage. The convertible bonds (Convertible Senior Notes) are also isolated from MicroStrategy's Bitcoin.
During the Bitcoin bull market of 2020 and 2021, the premium on GBTC attracted a large amount of arbitrage funds, and GBTC once accumulated over 650,000 bitcoins, which many industry insiders referred to as a 'clear bull market.'
In this bull market, MicroStrategy has attracted over $7 billion in qualified institutional investor funds through convertible bonds, and MicroStrategy's 21/21 plan is preparing to issue more bonds.
In contrast, MicroStrategy's convertible bonds have a long maturity date, with the earliest maturity date being in 2027, sufficient to last until the new cycle. If necessary, MicroStrategy can completely enforce the mandatory redemption of convertible bonds, allowing investors to convert their convertible bonds into nearly 0-cost newly issued MicroStrategy stock without MicroStrategy actually repaying money. Even if redeemed all the way until maturity, MicroStrategy can issue new convertible bonds to replace the old ones, just as MicroStrategy redeemed the 2028 Secured Notes with cash from the 2024 Convertible Notes issued on September 20, 2024. Clearly, MicroStrategy's convertible bonds are more robust.
Luna Vs. At-the-Market Equity Offerings:
In the Luna case, burning $1 of LUNA can mint $1 of algorithmic stablecoin UST. As long as the price of LUNA rises, more UST can be minted, and having more UST allows for the purchase of more Bitcoin as reserves, stabilizing 1 UST = 1 USDT. Luna directly targets ordinary investors without permission.
MicroStrategy's at-the-market stock issuance is quite similar, directly targeting ordinary investors in the secondary market. The higher MicroStrategy's stock price, the more dollars it can obtain through at-the-market equity offerings, which can buy more Bitcoin. 'Step on left foot, step on right foot' all the way up. After the Bitcoin ETF is approved in January 2024, MicroStrategy's net asset premium (market price per share / corresponding Bitcoin value -1) has climbed to 2.7. Currently, MicroStrategy holds 331,200 bitcoins, worth approximately $32.84 billion, while MicroStrategy's total market value once exceeded $100 billion.
Luna and UST can mint in both directions; if UST decouples, arbitrageurs can buy UST at a discount, mint LUNA at 1 UST = 1 USDT, creating a 'death spiral' and causing LUNA to collapse. In fact, if the Luna Foundation LFG had bought Bitcoin earlier and more during the upcycle (it only bought $1.5 billion worth of Bitcoin), and if UST could temporarily mint into LUNA in one direction, Luna likely would not have collapsed.
MicroStrategy goes a step further; the company's at-the-market stock issuance is one-way, avoiding a death spiral and is almost cost-free. MicroStrategy is clearly safer than Luna. Even during the bear market of 2022, MicroStrategy's net asset premium was at least 60%.
Source: mstr-tracker
As long as someone is willing to buy MicroStrategy stock through at-the-market equity offerings, the more Bitcoin MicroStrategy buys during its high NAV premium period, the thicker its safety cushion becomes. Ultimately, MicroStrategy's market value could equal its Bitcoin market value, and MicroStrategy itself would face no risk since the risks have shifted to stock investors.
In summary, can it be completely said that MicroStrategy is an enhanced version of 'Grayscale + Luna'?
Conclusion: Triple Maximism
At the Bitcoin conference held in Nashville at the end of July 2024, MicroStrategy CEO Michael Saylor delivered a keynote speech titled 'The Bitcoin Revolution.'
After 4 years of practice, he proposed a methodology for individuals, companies, institutions, and countries to respond to the Bitcoin revolution, suggesting a triple maximism strategy. For companies, it means buying Bitcoin through three avenues: cash flow, issuing stocks when the stock price is overvalued, and issuing debt when interest rates are low.
He said so, and he did so.
MicroStrategy has accumulated 331,200 bitcoins.
