Author: 0xCousin, IOBC Capital
Throughout Wall Street's history, there has never been a lack of legendary stories, but the strategic transformation of MicroStrategy (MicroStrategy) into a Bitcoin Treasury Company is destined to become an extraordinary new legend.
A Bitcoin strategy that has attracted global attention
In 2020, the COVID-19 pandemic triggered a global liquidity crisis, and countries adopted loose monetary policies to stimulate the economy, leading to currency depreciation and heightened inflation risks.
During the COVID-19 pandemic, Michael Saylor reassessed the value of Bitcoin. He believed that as the money supply grows at a rate of 15% per year, people need a hedge asset not tied to fiat cash flow. Therefore, he chose the Bitcoin strategy for MicroStrategy.
Compared to BTC ETFs or other Spot Bitcoin ETPs launched by companies like BlackRock, MicroStrategy's Bitcoin strategy is more aggressive. It purchases Bitcoin through idle company funds, issuing convertible bonds, and increasing share issuance, allowing the company to capture potential gains from Bitcoin's rise while bearing the potential risks of Bitcoin's decline, while ETFs/ETPs focus more on price tracking.
MicroStrategy's sources of funds and the history of Bitcoin purchases
MicroStrategy primarily raises funds to purchase Bitcoin through four means.
1. Using own funds to purchase
In the initial three investments, MicroStrategy invested idle funds on its balance sheet to make purchases. In August 2020, MicroStrategy spent $250 million to buy 21,400 BTC; in September, it invested $175 million to purchase 16,796 BTC; and in December, it invested $50 million to buy 2,574 BTC.
2. Issuing Convertible Senior Notes
To purchase more Bitcoin, MicroStrategy began to adopt the method of issuing convertible bonds for financing.
Convertible preferred bonds are a financial instrument that allows investors to convert bonds into company stock under specific conditions. These bonds typically have lower interest rates, or even zero, and set a conversion price above the current stock price. Investors are willing to buy such bonds mainly because they provide downside protection (i.e., the bond can be redeemed for principal and interest at maturity) and potential upside when the stock price rises. The interest rates on several convertible bonds issued by MicroStrategy are mostly between 0% and 0.75%, indicating that investors are confident in the rise of MSTR's stock price and hope to convert the bonds into stocks for greater returns.
3. Issuing Senior Secured Notes
In addition to convertible preferred bonds, MicroStrategy also issued a $489 million preferred secured bond maturing in 2028 with a 6.125% interest rate.
Senior secured bonds are a type of secured bond with lower risk than convertible preferred bonds, but these bonds offer only fixed interest income. The batch of senior secured bonds issued by MicroStrategy has chosen to redeem early.
4. At-the-Market Equity Offerings
With MicroStrategy's Bitcoin strategy beginning to show results, MSTR's stock price has continued to rise, prompting MicroStrategy to adopt more market price stock issuance methods for financing. This method of raising funds carries lower risk because it is not debt, has no repayment pressure, and lacks a foreseeable repayment date.
MicroStrategy has signed public market sales agreements with agents such as Jefferies, Cowen and Company LLC, and BTIG LLC. According to these agreements, MicroStrategy can issue and sell Class A common stock from time to time through these agents. This is known in the industry as an ATM.
At-the-market stock issuances are more flexible, allowing MicroStrategy to choose the timing of selling new shares based on secondary market conditions. While issuing new shares dilutes existing shareholder equity, the correlation with Bitcoin prices and the increase in the amount of BTC per MSTR share lead to complex market reactions, resulting in a relatively high volatility in MSTR's stock price.
The process of MicroStrategy purchasing Bitcoin through the above four methods is as follows:
Produced by: IOBC Capital
Corresponding to the price trend chart of BTC, MicroStrategy's specific purchase history is shown in the chart below:
Source: bitcointreasuries.net
As of December 30, 2024, MicroStrategy has invested a total of approximately $27.7 billion, purchasing 444,262 BTC at an average acquisition price of $62,257 per BTC.
Key questions regarding MicroStrategy's 'intelligent leverage' strategy for purchasing Bitcoin
There is considerable controversy in the market regarding MicroStrategy's 'intelligent leverage' strategy for purchasing Bitcoin. Here are my thoughts on several key issues that are widely discussed in the market:
1. Is MSTR's leverage risk high?
To conclude, it is not very high.
According to information disclosed by MSTR during the Q3 2024 earnings call, MSTR's total assets were approximately $8.344 billion, as the carrying value of Bitcoin in this financial report was only $6.85 billion (at that time, it held only 252,220 BTC, valued at an average price of $27,160). Total debt was approximately $4.57 billion, resulting in a debt-to-equity ratio of 1.21.
We will not discuss this accounting standard, but only consider the data at the time of actual sale, which reflects the latest market price. If we calculate based on Bitcoin's latest market price of $63,560 on September 30, 2024, the actual market value of Bitcoin held by MSTR is $16.03 billion, with a corresponding debt-to-equity ratio of only 0.35.
Let's take a look at the data as of December 30, 2024.
As of December 30, 2024, MicroStrategy's total outstanding liabilities amount to $7.27385 billion, as follows:
Produced by: IOBC Capital
As of December 30, 2024, MicroStrategy holds 444,262 BTC, valued at $42.25 billion. If the other part of MicroStrategy's assets remains unchanged (i.e., $1.49 billion), then MSTR's total assets would be $43.74 billion, with liabilities of $7.27385 billion, resulting in a debt-to-equity ratio of only 0.208.
Let's take a look at the debt-to-equity ratios of leading U.S. listed companies — Alphabet 0.05, Twitter 0.7, Meta 0.1, The Goldman Sachs Group 2.5, JPMorgan Chase & Co. 1.5.
MicroStrategy is a company that has transitioned from the software industry to the financial industry, and its debt-to-equity ratio is still healthy.
2. Under what circumstances could these convertible bonds become an unbearable burden in the future?
To conclude, if MicroStrategy does not continue to issue convertible bonds in the future, Bitcoin will only fall below $16,364 in the long run if MicroStrategy's holdings of 444,262 BTC are valued less than its total convertible bond amount of $7.27 billion. If MicroStrategy only uses ATM financing and idle funds to buy Bitcoin in the future, as MicroStrategy's holdings of Bitcoin increase, this 'insolvency' price line can become even lower.
If MicroStrategy continues to issue convertible bonds to buy Bitcoin during high prices and Bitcoin enters a bear market, leading to a situation where the value of Bitcoin holdings is less than the total convertible bond amount, it will cause MSTR's stock price to fall, subsequently affecting its refinancing and repayment capabilities, which could make the convertible bonds an unbearable burden.
MicroStrategy's convertible bonds allow bondholders to convert their bonds into MSTR stock, which is divided into two stages: 1. Initial stage — If the bond's trading price drops >2%, creditors can exercise their rights to convert the bond into MSTR shares and sell to recover their investment; if the bond's trading price remains normal or even rises, creditors can sell the bond on the secondary market to recover their investment at any time. 2. Later stage — When the bond is nearing maturity, the 2% rule no longer applies, and bondholders can either cash out or directly convert the bond into MSTR stock.
Since the convertible bonds issued by MicroStrategy are mostly low-interest or even zero-interest bonds, it is evident that creditors are actually looking for conversion premiums. If on the repayment date, MSTR's stock price has increased compared to the price at the time of financing, creditors are more likely to consider converting bonds to stocks. If MSTR's stock price has decreased compared to the price at the time of financing, creditors will consider asking for principal and interest.
If creditors choose not to convert to MSTR stock, and repayment to creditors is indeed required, MicroStrategy has multiple options:
Continue to issue new shares to obtain funds for repayment.
Continue to issue new bonds to pay off old debts; (This has already been done in September 2024)
Sell some Bitcoin to repay debts.
Therefore, currently, the likelihood of MicroStrategy being in an 'insolvency' situation is low.
3. Why are investors beginning to care about MSTR's BTC per share?
To conclude, the amount of BTC per share will determine MSTR's net asset value per share.
Whether issuing convertible bonds or ATMs, both are financing methods that involve diluting equity. The purpose of financing is to increase Bitcoin reserves. For MSTR shareholders, dilution of equity is a negative factor, traditionally speaking, it's not a good thing. The story MicroStrategy's management tells MSTR shareholders is — BTC Yield KPI.
Essentially, it means that as long as MSTR's market capitalization is higher than the total value of the BTC it holds, indicating a market capitalization premium rate, diluting MSTR's equity to buy BTC can increase the amount of BTC per MSTR share. An increase in the amount of BTC per MSTR share indicates that MSTR's net asset value per share is increasing, making it worthwhile for shareholders to dilute equity to finance the purchase of Bitcoin.
Currently, MicroStrategy holds 444,262 BTC, with a total holding value of approximately $42.256 billion. With an MSTR market capitalization of $80.37 billion, MSTR's market cap is 1.902 times the value of its Bitcoin holdings, meaning the current premium rate is 90.2%. The total equity of MSTR is 244 million shares, with each share corresponding to approximately 0.0018 BTC.
This is the core of what is called 'intelligent leverage', turning the difference between the company's market value and the market value of Bitcoin holdings into a capital operation advantage.
4. Why has MicroStrategy been more aggressive in buying Bitcoin in the past two months?
To conclude, it may be because MSTR's stock price is very high.
MicroStrategy has significantly increased the scale of financing to buy Bitcoin in the last two months. In November and December 2024, MicroStrategy invested $17.69 billion (accounting for 63.8% of total investment) through ATMs and convertible bond issuance to purchase 192,042 BTC (accounting for 43.2% of total purchases). Among them, only $3 billion were convertible bonds, while the remaining $14.69 billion were financed through ATMs.
Overall, the entire process of MicroStrategy's strategic allocation of Bitcoin has characteristics of regular investment in terms of time; however, in terms of quantity and amount, it seems to be more aggressive in bull markets than in bear markets.
I can't understand this feature, so I can only boldly guess that it may be because MSTR's stock price rose more in a bull market. In August 2024, after a high stock transfer, MSTR's stock price tripled, rising more than fourfold over the year, while Bitcoin only increased by 2.2 times this year.
MicroStrategy's CEO discussed a beautiful '42 billion plan' during the Q3 2024 earnings call.
British author Douglas Adams mentioned in 'The Hitchhiker's Guide to the Galaxy' that the supercomputer 'Deep Thought' provided the answer to 'life, the universe, and everything' as 42.
MicroStrategy believes this is a magical number, hence proposing a $42 billion financing plan. 21 is also a magical number, as the maximum total supply of Bitcoin is 21 million. Therefore, MicroStrategy plans to issue $21 billion in ATM + $21 billion in Fixed Income over the next three years to continue increasing its Bitcoin holdings.
Assuming MicroStrategy eventually finances $42 billion through share issuance, if the new shares are issued at a price of $330, the total share capital will become 371.3 million shares. If MicroStrategy buys Bitcoin at an average price of $100,000, the company could increase its holdings by 420,000 BTC, bringing MicroStrategy's total holdings to 864,262 BTC. At that time, the amount of BTC per share would increase to 0.00233, representing a growth of approximately 29.4%. In this case, MSTR's total market capitalization would be $122.53 billion, and the total value of holdings would be $86.4 billion. Under these circumstances, the market capitalization premium rate would still exist.
Five, what other upward forces remain for Bitcoin after MicroStrategy?
To conclude, aside from publicly traded companies that have been driven to purchase Bitcoin by MicroStrategy, I can only think of more national strategic reserves. However, I don't have high expectations for this bull market.
The main buyers driving Bitcoin's rise in this cycle are as follows:
1. Long Term Holders with a strong consensus on Bitcoin
The long-term rise of Bitcoin does not require a reason; it is as natural as monkeys climbing trees or mice burrowing, because it is digital gold.
After Bitcoin fell below $16,000, the most mainstream Antminer S17 series mining machines were near shut-off price levels, while the Shenua M30S, Hippo H2, and Antminer T19 mining machines also fell into the shut-off price range. In this price range, even if nothing happens, a rebound will still occur. The transition between bull and bear markets is like a basketball falling from a height, bouncing several times with diminishing returns after hitting the ground.
Source: glassnode
As seen in the above chart, Long Term Holders have been continuously adding to their positions since the end of 2022.
After more than a decade of development, the consensus on Bitcoin has become strong enough, with on-site investors and Long Term Holders having consensus around the prices of mainstream mining machines.
2. ETFs bring incremental capital to traditional financial markets
Since the launch of BTC ETFs, there has been a cumulative net inflow of 528,600 BTC. This bull market has brought nearly $36 billion in incremental buying to Bitcoin via ETFs, and $2.6 billion in incremental buying to ETH.
Source: coinglass.com
In addition, the approval of BTC ETFs (and ETH ETFs) will also create a ripple effect, prompting more traditional financial institutions to pay attention to and invest in the crypto space.
3. MicroStrategy continues to buy, and multiple listed companies follow suit, resulting in a Davis Double.
According to Bitcointreasuries data, as of December 30, 2024, there are 149 entities holding a total of over 2.95 million Bitcoins. Moreover, this data is still rapidly increasing recently.
Source: bitcointreasuries.net
Among these entities holding Bitcoin, 73 are publicly traded companies, 18 are private enterprises, 11 are countries, 42 are ETFs or Funds, and 5 are DeFi protocols.
MicroStrategy is the first publicly traded company to adopt the 'Bitcoin Treasury Company' strategy, but not the only one. Public companies like Marathon Digital Holdings, Riot Platforms, and Boyaa Interactive International Limited also practice this strategy. However, MicroStrategy still has the greatest influence.
4. National-level strategic reserves
Some governments are currently holding Bitcoin. The specific details are shown in the chart below:
Source: bitcointreasuries.net
Although these countries hold Bitcoin, most of it was seized by law enforcement during enforcement actions. They just haven't sold it temporarily and do not qualify as stable Holders.
Among these countries, only El Salvador is truly a BTC Holder. El Salvador has been buying Bitcoin since 2021, acquiring 1 BTC daily, and currently holds 6,002 BTC, valued at over $560 million.
Additionally, Bhutan holds 11,688 BTC through Bitcoin mining. However, Bhutan is not classified as a BTC Holder, as it has reduced its holdings in the past two months.
U.S. President Trump stated during the campaign that if he were elected president, he would establish a Bitcoin strategic reserve.
If there's anything that can further drive the price of Bitcoin after MicroStrategy, it would be Trump's promotion of the U.S. government's Bitcoin strategic reserve upon taking office, which could lead to more countries adopting Bitcoin as a strategic reserve.
Summary
MicroStrategy's Bitcoin strategy is not only a corporate transformation business experiment but also a significant innovation in financial history. Through ingenious capital operations, intelligent leverage, and profound insights into Bitcoin's value, it has not only earned itself a brilliant market value growth but also pushed Bitcoin deeper into the view of traditional finance, breaking through the barriers between crypto assets and mainstream capital markets.
MicroStrategy's bold attempt may just be the prologue to the Bitcoin legend, or merely a small step in the true rise of Bitcoin, but it could represent a significant step in the new financial era.
