Author: Jack Inabinet, Bankless; Translated by: Bai Shui, Jinse Finance
Michael Saylor's MicroStrategy (MSTR) has been accumulating BTC since 2020 and has become unstoppable, transforming this software company into one of the best-performing equity investment firms over the last two bull market cycles.
Despite experiencing massive losses every quarter in 2024, MSTR's performance has easily outpaced BTC, with prices doubling in a parabolic manner since September and rising 200% year-to-date!
At MicroStrategy's recent earnings call on October 30, company executives announced their '21/21 plan', a strategic initiative aimed at raising $42 billion in capital (equivalent to 80% of MSTR's market value at the time) on a 50/50 basis. The planned combination of stock sales and bond issuance became the largest secondary stock offering in U.S. stock market history.
Today, we will decode Michael Saylor's infinite money machine and explore how MicroStrategy intends to become a trillion-dollar company.
What is Saylor creating?
MicroStrategy announced in August 2020 that it would spend $250 million to acquire 21,454 BTC, becoming the first publicly traded company to implement a BTC funding strategy, with this initial investment yielding a return of nearly 500% over its four-year lifecycle.
As of September 2024, MicroStrategy holds 252,220 bitcoins.
Although MicroStrategy has maintained its status as a BTC giant among direct corporate holders, the launch of a spot BTC ETF in January 2024 has reshaped the landscape of major holders, with BlackRock surpassing MicroStrategy to become the fourth largest entity holding BTC, following Binance, Sabase, and Coinbase.
While the market initially valued Microstrategy at five times its BTC asset value, as holders gradually realized they would be permanently diluted to fund additional BTC purchases, and by the end of 2021, as the bear market stagnated, this premium began to disappear, with MSTR finding its trading price below its net asset value (NAV).
Unlike when MicroStrategy first began accumulating BTC in 2020, investors no longer need to exit traditional markets to gain exposure to crypto assets, but even in the era of ETFs, MSTR stock has continued to trade at a persistent premium since February 2024.
Compared to a simple spot ETF that tracks BTC performance (minus management fees), MicroStrategy offers its shareholders a BTC accumulation strategy tool that can increase the number of tokens per share.
When MSTR stock trades above its held BTC, MicroStrategy can conveniently raise funds in two ways: through parity stock issuance and convertible bond sales. The authorization for parity stock issuance allows MicroStrategy to issue and sell new MSTR shares to raise cash, while convertible bond sales enable MicroStrategy to borrow money under extremely favorable conditions in exchange for cash or a certain number of MSTR shares in the future.
In its Q2 2024 earnings report, Microstrategy introduced 'BTC Yield' as a key investor performance metric to emphasize the quarter-over-quarter growth of BTC holdings per share.
Despite the ongoing bear market, MicroStrategy unorthodoxly secured a $205 million BTC-backed term loan from Silvergate in March 2022, yet crypto industry experts often compare the company to a money printing machine, as its executives seem to raise unlimited cash to buy BTC through stock dilution during market booms.
In a recent interview with analysts from the sell-side research firm Bernstein, Michael Saylor revealed his company's ultimate goal: to transform into a mature bitcoin financial services provider.
When shareholders buy MSTR, they are not only purchasing BTC but also the management's ability to effectively utilize the capital markets and balance sheet to generate more returns.
Investment Considerations
MSTR's performance in 2024 has undoubtedly outperformed BTC, but historically, it has also exhibited higher volatility, experiencing more severe downturns alongside substantial upward rebounds. Speculators seeking leveraged BTC exposure are better off directly utilizing the underlying asset.
While astutely utilizing public capital markets allows MSTR shareholders to accumulate more BTC, Microstrategy's ability relies on investors' willingness to continue purchasing its stock at a premium.
As shown in 2022, MSTR stock may trade below net asset value for an extended period. If convertible bonds mature while the net asset value remains at a discount, Microstrategy will be forced to sell an unexpectedly large number of shares to dilute investor equity or sell held BTC to redeem outstanding bonds.
The FASB rule change set to take effect this December will allow digital assets to be reported at their fair market value. Although Microstrategy has announced net profit losses for three consecutive quarters in 2024, adopting these new accounting standards will have a positive impact on the company's finances, making MSTR a potential candidate for the S&P 500 index. Adding it to that index or others like the Nasdaq 100 will unleash passive price-neutral liquidity that can be sold to accumulate more BTC!
Compared to investments in non-productive spot BTC, Microstrategy stock has the capacity to accumulate additional tokens, and unlike companies in the extremely competitive cryptocurrency mining sector, Microstrategy has a significant differentiation advantage due to its large BTC moat. As long as there is a desire to speculate on bitcoin, investors can rest assured knowing that someone may be willing to purchase stocks at a premium or lend cash under favorable conditions.
