Article reprint source: Vernacular Blockchain
By Zack Guzman
Translation: Blockchain in Vernacular
MicroStrategy founder Michael Saylor has become one of Bitcoin’s most outspoken supporters, boldly declaring, “There is no second best option.”
Since 2020, Saylor has purchased more than $30 billion worth of Bitcoin through his listed companies, with a book profit of more than $14 billion, making MicroStrategy the company with the largest Bitcoin holdings. This strategy has won praise from Bitcoin maximalists, but also attracted doubts from traditional investors.
Yet as MicroStrategy continues to raise billions of dollars — with plans to raise $42 billion in new funding over the next three years — to quadruple its bet on Bitcoin, concerns are growing. Is this the beginning of another huge bubble? And if Bitcoin prices fall, how will MicroStrategy’s bold move play out?
1. Echoes of the Ghost of Trading
MicroStrategy's Bitcoin strategy has similarities to one of the most notorious trades in the crypto space, the "GBTC premium trade." At the peak of this wave of arbitrage trading, investors gained Bitcoin exposure through the Grayscale Bitcoin Trust (GBTC) because it traded at a higher price than the value of the underlying Bitcoin holdings. They took out loans in exchange for shares of GBTC and earned premium income after the lock-up period ended.
The trade collapsed dramatically in 2021, when the GBTC premium turned into a discount. Overleveraged firms or those associated with leveraged clients, such as Three Arrows Capital and BlockFi, collapsed. The subsequent wave of bankruptcies, including that of Genesis, highlighted the risks of financial strategies built on fragile market imbalances.
Today, critics warn that MicroStrategy is walking a similar tightrope. But instead of taking advantage of the GBTC premium, MicroStrategy is creating a new path for leveraged Bitcoin trading through its own stocks and bonds—effectively turning the company into a leveraged Bitcoin proxy.
MicroStrategy’s Bitcoin purchases over time
2. The magic of convertible bonds
The core of MicroStrategy's strategy is to raise funds through the issuance of convertible bonds and stocks. Here's how it works:
Borrow at Low Interest Rates (0%)MicroStrategy offers bonds to bondholders at very low or even zero interest rates.
In return, bondholders can convert their bonds into MicroStrategy shares if the stock price rises. This potential gain has attracted many institutional investors, including Allianz, Germany's largest insurance company.
The funds raised from buying more Bitcoin are then used to buy more Bitcoin, driving the stock price up further.
This feedback loop has led to an astonishing performance for MicroStrategy's stock, which is up nearly 500% in 2024 alone. The strategy has been so successful that bond investors, attracted by the potential appreciation in the stock price, are willing to lend billions of dollars to the company at 0% interest.
It’s an attractive argument: Why settle for low-interest returns on bonds when MicroStrategy offers the chance to double or even quintuple your investment? As Saylor put it in a recent investor call, bondholders are fleeing a world of “negative real returns” for the potential gains offered by Bitcoin.
MicroStrategy’s strategy is working extremely well right now, with the rise in Bitcoin prices creating a virtuous cycle. But what happens if Bitcoin’s trend reverses?
MicroStrategy owns nearly 387,000 bitcoins, worth about $37 billion, but its stock market valuation has exceeded $100 billion. This super-high valuation relies heavily on the assumption that the price of bitcoin will continue to rise. If bitcoin falls, the company's stock price - essentially a leveraged bet on bitcoin - could fall sharply.
It is also important to note that double-leveraged ETFs like MSTU and MSTX, which focus on MicroStrategy, also further exacerbate market speculation based on MicroStrategy's Bitcoin speculation.
All of this has driven a massive amount of Bitcoin buying. In fact, MicroStrategy's buying far exceeded the combined inflows of all Bitcoin ETFs earlier this month, according to research from Fundstrat. If the market begins to doubt whether MicroStrategy can achieve its $42 billion fundraising goal, the price of Bitcoin could fall, further jeopardizing MicroStrategy's ability to raise funds. And once this situation changes, the situation could deteriorate rapidly. Similar situations occurred when FTX tried to raise funds when it needed them most, and when Terra was in the midst of its $40 billion collapse.
Although Saylor has repeatedly stressed 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 cautionary tale of GBTC’s premium trading is still fresh. When market conditions changed, the bubble burst, exposing the fragility of leveraged strategies. While MicroStrategy’s approach avoids some of the pitfalls of GBTC trading—it doesn’t rely on an inefficient fund structure, for example—it faces the same core risk: If the price of Bitcoin falls, leverage can amplify losses.
Saylor’s unwavering belief in Bitcoin may inspire confidence, but history shows that markets can’t rise indefinitely. Just as overconfidence in a “self-sustaining system” led to a $40 billion loss in the Terra crash in 2023, MicroStrategy’s stock price could face a similar moment of reckoning if Bitcoin prices fall.
However, for Bitcoin supporters who are convinced that the U.S. government will follow suit and add Bitcoin to its strategic reserves, MicroStrategy's bet has the potential to become the greatest investment in history - either known as a "genius move" or a "disastrous failure."
