MicroStrategy's aggressive Bitcoin purchases and leveraged financing have achieved short-term success, but its over-reliance on rising Bitcoin prices also poses tremendous risks, especially in the face of future market volatility.
Author: Zack Guzman
Translation: Plain Language Blockchain
MicroStrategy's founder, Michael Saylor, has become one of the most outspoken supporters of Bitcoin, boldly declaring, "There is no second-best choice."
Since 2020, Saylor has accumulated over $30 billion in Bitcoin through his publicly traded company, with paper profits exceeding $14 billion, making MicroStrategy the company holding the most Bitcoin. This strategy has garnered praise from Bitcoin extremists, while also attracting skepticism from traditional investors.
However, as MicroStrategy continues to raise billions of dollars—planning to add $42 billion in financing over the next three years—concerns from the outside world are also intensifying. Will this brew another massive bubble? How will MicroStrategy's bold actions end if the price of Bitcoin falls?
1. Echoes of Trading Ghosts
MicroStrategy's Bitcoin strategy bears similarities to one of the most notorious trades in the crypto space: "GBTC premium trading." At the peak of this arbitrage trade, investors gained exposure to Bitcoin through the Grayscale Bitcoin Trust (GBTC), as its trading price exceeded the value of the underlying Bitcoin holdings. They borrowed against GBTC shares and earned premium profits after the lock-up period ended.
This trade experienced a dramatic collapse in 2021 when the GBTC premium turned into a discount. Over-leveraged companies or those associated with leveraged clients, such as Three Arrows Capital and BlockFi, went bankrupt one after another. The subsequent wave of bankruptcies, including Genesis, highlighted the risks of financial strategies built on fragile market imbalances.
Today, critics warn that MicroStrategy is walking a similar tightrope. But unlike leveraging GBTC premiums, MicroStrategy has carved out a new path for Bitcoin leveraged trading through its own stock and bonds—essentially transforming the company into a leveraged Bitcoin proxy.
Some periods of MicroStrategy's Bitcoin buying behavior
2. The Magic of Convertible Bonds
The core of MicroStrategy's strategy is to raise funds by issuing convertible bonds and stocks, which operates as follows:
By borrowing at low interest rates (0%), MicroStrategy offers bondholders extremely low or even zero interest bonds.
Offering stock appreciation potential as a return, bondholders can convert their bonds into MicroStrategy's stock when the stock price rises. This potential return has attracted numerous institutional investors, including Germany's largest insurance company, Allianz.
Funds raised to purchase more Bitcoin are immediately used to buy more Bitcoin, further driving up the stock price.
This feedback loop has resulted in astonishing stock performance for MicroStrategy, with a nearly 500% increase just in 2024. This strategy has been so successful that bond investors are willing to lend billions to the company at 0% interest, attracted by the potential appreciation of the stock price.
It's an attractive proposition: why settle for low returns on bonds when MicroStrategy can offer you the opportunity to double or even quintuple your investment? As Saylor stated in a recent investor call, bondholders are fleeing a world of "negative real returns" in pursuit of the potential gains from Bitcoin.
Currently, MicroStrategy's strategy is performing exceptionally well, with rising Bitcoin prices creating a virtuous cycle. But what will happen if Bitcoin's trend reverses?
MicroStrategy holds nearly 387,000 Bitcoin, worth about $37 billion, but its market valuation has exceeded $100 billion. This extraordinarily high valuation relies heavily on the assumption of continued rising Bitcoin prices. If Bitcoin falls, the company's stock price—which is essentially a leveraged bet on Bitcoin—could plummet significantly.
It is also worth noting that double-leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, have further exacerbated market speculation based on MicroStrategy's Bitcoin speculation.
All of this has driven massive Bitcoin purchases. According to Fundstrat's research, MicroStrategy's buying volume far exceeds the total inflow of all Bitcoin ETFs earlier this month. If the market begins to doubt MicroStrategy's ability to achieve its $42 billion financing goal, Bitcoin prices could fall, further jeopardizing MicroStrategy's financing capabilities. Once this situation changes, things could rapidly deteriorate. A similar situation occurred during FTX's most critical funding attempts and when Terra faced its $40 billion collapse.
Despite Saylor's repeated emphasis that the company will never sell its Bitcoin, this stance may be difficult to maintain if debt pressures increase and Bitcoin prices fall.
3. Historical Lessons
The warning story of GBTC premium trading is still vivid. When market conditions change, this bubble bursts, exposing the fragility of leveraged strategies. Although MicroStrategy's approach avoids some of the pitfalls of GBTC trading—such as not relying on inefficient fund structures—it still faces a core risk: if the price of Bitcoin falls, leverage could amplify losses.
Saylor's firm belief in Bitcoin may inspire confidence, but history shows that markets cannot rise indefinitely. Just as in 2023, when the Terra collapse occurred, an overconfidence in a "self-sustaining system" led to a loss of $40 billion; if the price of Bitcoin falls, MicroStrategy's stock could also face a similar liquidation moment.
However, for those Bitcoin supporters who firmly believe that the U.S. government will soon follow suit and incorporate Bitcoin into its strategic reserves, MicroStrategy's bet has the potential to become one of the greatest investments in history—either known as a "stroke of genius" or remembered for its "catastrophic failure."
Article link: https://www.hellobtc.com/kp/du/11/5560.html
Source: https://finance.yahoo.com/news/microstrategy-creating-next-big-bitcoin-123000918.html
