Original title: (Understanding MSTR's Bitcoin Strategy in One Article)
Original author: 0xCousin, IOBC Capital
In the history of Wall Street, legendary stories are never in short supply, but MicroStrategy's Bitcoin Treasury Company strategic transformation is destined to become a unique new legend.
A Bitcoin strategy that has attracted global attention
In 2020, the COVID-19 pandemic triggered a global liquidity crisis, with countries adopting loose monetary policies to stimulate the economy, leading to currency devaluation and increased inflation risk.
During the COVID-19 pandemic, Michael Saylor reassessed the value of Bitcoin. He believes that when the money supply grows at a rate of 15% per year, people need a hedge asset that is not linked to fiat cash flow. Therefore, he chose the Bitcoin strategy for MicroStrategy.
Compared to the BTC ETFs or other Spot Bitcoin ETPs launched by companies like BlackRock, MicroStrategy's Bitcoin strategy is more aggressive. It purchases Bitcoin using company idle funds, issuing convertible bonds and increasing shares to achieve this, gaining potential profits from Bitcoin's rise while bearing the risks from its decline, while ETFs/ETPs focus more on price tracking.
MicroStrategy's sources of funds and Bitcoin purchasing history
MicroStrategy mainly raises funds to purchase Bitcoin through four channels.
1. Use own funds to purchase
In the initial three investments, MicroStrategy used idle funds to purchase Bitcoin. In August 2020, MicroStrategy spent $250 million to acquire 21,400 BTC; in September, it invested $175 million to buy 16,796 BTC; and in December, it spent $50 million to purchase 2,574 BTC.
2. Issuing Convertible Senior Notes
To purchase more Bitcoin, MicroStrategy began financing through the issuance of convertible bonds.
Convertible senior bonds are a financial instrument that allows investors to convert bonds into company stock under specific conditions. These bonds typically have low or even zero interest rates, while setting a conversion price higher than the current stock price. Investors are willing to purchase such bonds mainly because they provide downside protection (i.e., the principal and interest can be recovered at maturity) and potential gains when the stock price rises. The interest rates of several series of convertible bonds issued by MicroStrategy mostly range from 0% to 0.75%, indicating that investors are confident in MSTR's stock price increase, hoping the bonds will convert to stocks for greater returns.
3. Issuing Senior Secured Notes
In addition to convertible senior notes, MicroStrategy also issued a $489 million senior secured bond with a 6.125% interest rate due in 2028.
Senior secured bonds are a type of secured bond, with lower risk than convertible senior bonds, but these bonds only provide fixed interest income. MicroStrategy's batch of senior secured bonds has chosen to repay early.
4. At-the-Market Stock Offerings
As MicroStrategy's Bitcoin strategy begins to show results, MSTR's stock price continues to rise, leading the company to adopt more at-the-market stock offerings for financing. This method carries lower risks because it is not debt, has no repayment pressure, and does not involve a predictable repayment date.
MicroStrategy has signed public market sales agreements with agents such as Jefferies, Cowen and Company LLC, and BTIG LLC. Based on these agreements, MicroStrategy can periodically issue and sell Class A common stock through these agents. This is what is known in the industry as ATM.
Market price stock issuance is more flexible; MicroStrategy can choose the timing to sell new shares based on secondary market conditions. Although issuing shares dilutes existing shareholders' equity, changes in the correlation with Bitcoin prices and the increase in BTC per share of MSTR lead to complex market reactions, with MSTR's stock price exhibiting high volatility overall.
MicroStrategy's journey in purchasing Bitcoin through the above four methods is as follows:
Produced by: IOBC Capital
Corresponding to the BTC price trend chart, MicroStrategy's specific purchase history is shown in the chart below:
Source: bitcointreasuries.net
As of December 30, 2024, MicroStrategy has invested approximately $27.7 billion in total, purchasing 444,262 BTC at an average acquisition price of $62,257 per coin.
Key Questions About MicroStrategy's 'Intelligent Leverage' Bitcoin Purchases
There is considerable debate in the market regarding MicroStrategy's 'intelligent leverage' strategy for purchasing Bitcoin. I would like to share my thoughts on several key questions that have been hotly discussed in the market:
1. Is MSTR's leverage risk high?
First, the conclusion is that it is not very high.
According to the information disclosed by MSTR in the Q3 2024 earnings call, MSTR's total assets were approximately $8.344 billion at that time, as the carrying value of Bitcoin in this earnings report was only $6.85 billion (at that time, there were only 252,220 coins, calculated at a price of $27,160). Total debt was approximately $4.57 billion, resulting in a debt-to-equity ratio of 1.21.
We do not discuss this accounting standard and only consider the data at the time of actual sale, which reflects the latest market price. If we calculate based on the latest market price of Bitcoin as of September 30, 2024 ($63,560), the actual market value of the Bitcoin held by MSTR would be $16.03 billion, resulting in a 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 were $7.27385 billion, detailed as follows:
Produced by: IOBC Capital
As of December 30, 2024, MicroStrategy holds 444,262 Bitcoins valued at $42.25 billion. If other assets of MicroStrategy remain unchanged (i.e., $1.49 billion), then MSTR's total assets would be $43.74 billion, and liabilities would be $7.27385 billion, resulting in a debt-to-equity ratio of only 0.208.
Let's look at the debt-to-equity ratios of leading publicly traded companies in the U.S. - 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 transformed from the software industry to the financial industry, and this 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, the value of the 444,262 BTC it holds will only fall below the total amount of its convertible bonds of $7.27 billion if Bitcoin long-term falls below $16,364. If MicroStrategy only uses ATM financing and idle funds to buy Bitcoin in the future, as the number of Bitcoins held by MicroStrategy increases, this 'insolvency' price line could become even lower.
If MicroStrategy continues to issue convertible bonds to buy Bitcoin at high prices and Bitcoin enters a bear market, the decline in Bitcoin prices could lead to the value of MicroStrategy's Bitcoin holdings falling below the total amount of its convertible bonds, which would also cause MSTR's stock price to languish, thereby affecting its refinancing ability and debt repayment capability, ultimately making the convertible bonds an unbearable burden.
MicroStrategy's convertible bonds give bondholders the right to convert their bonds into MSTR stock, divided into two phases: 1. Initial phase - If the trading price of the bonds drops >2%, creditors can exercise their rights, converting the bonds into MSTR shares and selling them for a return; if the trading price of the bonds remains normal or increases, creditors can sell the bonds in the secondary market at any time for a return. 2. Later phase - As the bonds approach maturity, the 2% rule no longer applies, and bondholders can either retrieve cash and leave or directly convert the bonds into MSTR stock.
Since the convertible bonds issued by MicroStrategy are mostly low-interest or even zero-interest bonds, it is clear that creditors are primarily seeking stock conversion premiums. If at the repayment date, MSTR's stock price has increased compared to the financing price, creditors are more likely to consider converting the bonds into stocks. Conversely, if MSTR's stock price has decreased, creditors may seek repayment of the principal and interest.
If creditors do not choose to convert into MSTR stock and ultimately do need to repay the creditors, MicroStrategy has several options:
· Continue to issue new shares to obtain funds for repayment;
· Continue to issue new bonds to repay old debts; (This has already been done in September 2024)
· Sell some Bitcoin to repay debts.
Therefore, at present, the likelihood of MicroStrategy falling into an 'insolvency' situation is low.
3. Why are investors beginning to care about MSTR's BTC per share?
First, the conclusion is that the BTC per share will determine MSTR's book value per share.
Whether issuing convertible bonds or using ATM, both achieve financing through share dilution. The goal of financing is to increase Bitcoin reserves. For MSTR's shareholders, share dilution is a negative factor, traditionally seen as a bad thing. The story MicroStrategy's management tells MSTR shareholders is - BTC Yield KPI.
Essentially, as long as MSTR's market value is higher than the total value of the BTC held, i.e., there is a market cap premium rate, diluting MSTR's shares to buy BTC can enhance the BTC per share of MSTR. An increase in MSTR's BTC per share means that MSTR's book value per share is growing, making share dilution to finance Bitcoin purchases still worthwhile for shareholders.
Currently, MicroStrategy holds 444,262 BTC, with a total position value of approximately $42.256 billion. With MSTR's current market capitalization of $80.37 billion, MSTR's market cap is 1.902 times the Bitcoin position value, indicating a current premium rate of 90.2%. MSTR's total shares outstanding are 244 million, with each share corresponding to approximately 0.0018 BTC.
This is the core of what is referred to as 'intelligent leverage,' transforming the difference between the company's market value and the value of Bitcoin holdings into a capital operational advantage.
4. Why has MicroStrategy been more aggressive in buying Bitcoin in the last two months?
First, the conclusion is that it may be due to MSTR's high stock price.
MicroStrategy has significantly increased its 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 ATM and convertible bonds, purchasing 192,042 BTC (accounting for 43.2% of the total purchases). Of this, only $3 billion was through convertible bonds; the remaining $14.69 billion was financed through ATM.
Overall, MicroStrategy's strategic allocation of Bitcoin throughout this process exhibits characteristics of regular investment over time; however, in terms of quantity and amount, it appears to be more aggressive during bull markets than during bear markets.
I cannot understand this characteristic and can only boldly speculate that it may be because MSTR's stock price has increased more during the bull market. In August 2024, after a stock split, MSTR's stock price tripled, and the annual rise exceeded four times, while Bitcoin only increased by 2.2 times this year.
The CEO of MicroStrategy discussed a beautiful '42B Plan' during the Q3 2024 earnings call.
British author Douglas Adams mentions in (The Hitchhiker's Guide to the Galaxy) that the supercomputer 'Deep Thought' gave the result of 42 as the 'ultimate answer to life, the universe, and everything.'
MicroStrategy believes this is a magical number, thus proposing a $42 billion financing plan. 21 is also a magical number, as the total maximum amount of Bitcoin is 21 million. Hence, MicroStrategy plans to issue $21 billion in ATM + $21 billion in Fixed Income over the next three years to continue increasing Bitcoin holdings.
Assuming MicroStrategy ultimately raises $42 billion through a share issuance at a price of $330 per share, the total number of shares would increase to 371.3 million. If MicroStrategy buys Bitcoin at an average price of $100,000, the company could acquire 420,000 BTC, bringing MicroStrategy's total holdings to 864,262 BTC. At that time, each share would represent approximately 0.00233 BTC, an increase of about 29.4%. At this point, MSTR's total market capitalization would be $122.53 billion, with total BTC holdings valued at $86.4 billion. In this case, the market cap premium rate would still exist.
5. After MicroStrategy, what other factors could drive Bitcoin's price up?
To conclude, beyond the publicly listed companies influenced by MicroStrategy to buy Bitcoin, there are currently only more national strategic reserves to consider, but not much hope for this in this bull market.
The primary buying pressure for Bitcoin during this cycle comes from the following:
1. Long-term holders with strong consensus on Bitcoin
The long-term rise of Bitcoin does not require justification; it is as natural to BTC enthusiasts as monkeys climbing trees and mice burrowing, because it is digital gold.
After Bitcoin fell below $16,000, the most mainstream Antminer S17 series miners were at shutdown prices, while others like the Bitmain M30S, the H2, and Antminer T19 were also falling into the shutdown price range. This price range will see a rebound, even if nothing happens. The transition between bull and bear markets is like a basketball falling freely from a height, bouncing multiple times with decreasing intensity after hitting the ground.
Source: glassnode
As seen in the chart above, by the end of 2022, long-term holders have been consistently increasing their positions.
After more than a decade of development, the consensus around Bitcoin is strong enough, with on-chain investors and long-term holders reaching consensus near the shutdown price of mainstream mining machines.
2. ETFs bring incremental capital from traditional financial markets
Since the BTC ETF has been approved, a total of 528,600 BTC has flowed in, with ETF contributing nearly $36 billion in incremental buying for Bitcoin during this bull market, and $2.6 billion for ETH.
Source: coinglass.com
In addition, the approval of BTC ETF (and ETH ETF) will also have a boosting effect, leading more traditional financial institutions to start paying attention to and investing in the crypto space.
3. MicroStrategy continues to buy, with several publicly listed companies following suit, leading to a Davis double effect.
According to Bitcointreasuries data, as of December 30, 2024, a total of 149 entities hold over 2.95 million Bitcoins. Moreover, this number has been rapidly increasing recently.
Source: bitcointreasuries.net
Among the entities holding Bitcoin, there are 73 publicly traded companies, 18 private companies, 11 countries, 42 ETFs or funds, and 5 DeFi protocols.
MicroStrategy is the first publicly traded company to adopt a 'Bitcoin Treasury Company' strategy, but it is not the only one. Companies like Marathon Digital Holdings, Riot Platforms, and Boyaa Interactive International Limited have also implemented this strategy, but MicroStrategy has had the most significant impact.
4. National-level strategic reserves
Some governments have already started holding Bitcoin. The specific details are shown in the image below:
Source: bitcointreasuries.net
Although these countries hold Bitcoin, most of it was seized by law enforcement during enforcement actions. They have temporarily not sold, and do not qualify as stable holders.
Among these countries, El Salvador is probably the only true BTC holder. Since 2021, El Salvador has been buying Bitcoin, 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 a BTC holder and has reduced its holdings in the last two months.
U.S. President Trump stated during his campaign that if he were elected president, he would establish a Bitcoin strategic reserve.
If there is anything else that could drive Bitcoin's price up after MicroStrategy, it would be Trump taking office and promoting the U.S. government's Bitcoin strategic reserves, thereby encouraging more countries to build strategic reserves of Bitcoin.
Summary
MicroStrategy's Bitcoin strategy is not only a business experiment in corporate transformation but also a significant innovation in financial history. Through sophisticated capital operations, intelligent leverage, and profound insights into Bitcoin's value, it has not only achieved remarkable growth in its market capitalization but also brought Bitcoin more profoundly into the traditional financial spotlight, breaking down 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, yet it could represent a significant leap into a new financial era.
Reference materials:
https://www.microstrategy.com/press/microstrategy-announces-third-quarter-2024-financial-results-and-announces-42-billion-capital-plan_10-30-2024
https://www.hope.com/for-corporations
https://bitcointreasuries.net/
