It is well known that MicroStrategy's owner Michael Saylor is a Bitcoin enthusiast, continuously accumulating regardless of bull or bear markets. With Trump's victory, Bitcoin surged close to the $100,000 mark, while MicroStrategy, holding 386,000 Bitcoins, saw its stock price rise dramatically, with an increase of about 500% since the beginning of the year, outperforming Bitcoin's 121%.
How does MicroStrategy's strategy work? Can MicroStrategy still rise? Is it the leveraged version of Bitcoin or the new Luna of this round? Let's take a look with WOO X Research!
What strategy does MicroStrategy use to purchase Bitcoin?
Currently, most people's impression of MicroStrategy is primarily based on purchasing Bitcoin; however, MicroStrategy is a technology company founded in 1989, whose main business is providing data analysis solutions to help businesses with data analysis and decision-making.
In August 2020, CEO Michael Saylor recognized the value of Bitcoin and considered it a scarce digital asset with long-term appreciation potential, capable of combating inflation and preserving value, converting the company's $250 million reserves into Bitcoin, marking the beginning of MicroStrategy's aggressive accumulation.
As of November 2024, MicroStrategy holds approximately 386,700 Bitcoins, accounting for 1.8% of the global total.
How did they do it?
MicroStrategy issues debt to purchase Bitcoin:
The company raises funds by issuing bonds (such as convertible bonds) and then uses these funds to purchase Bitcoin.
This is the starting point of the strategy, using leverage to increase Bitcoin holdings.
As the price of Bitcoin rises, MicroStrategy's market capitalization increases:
As the price of Bitcoin rises, the asset value of MicroStrategy (the large amount of Bitcoin held) also increases, driving the market cap of the company's stock.
Market capitalization increases, raising the weight of stocks in the index:
The growth in market capitalization increases the weight of MicroStrategy's stocks in financial indices (such as S&P 500, NASDAQ, etc.).
More index funds need to allocate MicroStrategy stocks, further pushing up stock prices.
MicroStrategy issues stocks to purchase Bitcoin:
After the market capitalization increases, MicroStrategy utilizes the demand for its stocks to issue new shares at a premium, selling and purchasing Bitcoin.
As the price of Bitcoin rises, it further drives market capitalization:
Newly purchased Bitcoin increases the company's asset value and market capitalization as prices rise.
The growth in market capitalization further enhances the attractiveness of stocks in the market.
MicroStrategy issues stock again, repeating the cycle:
MicroStrategy utilizes the increase in stock market value to repeatedly conduct new rounds of stock issuance and Bitcoin purchases, forming a 'flywheel effect.'
The focus of MicroStrategy is to initiate a positive flywheel cycle, making Bitcoin and MicroStrategy's market capitalization an upward perpetual motion machine; delving into the details can reveal the intricacies of this model.
Currently, MicroStrategy has five convertible bonds in the market, with a principal value of $4.25 billion, maturing between 2027 and 2032, which are medium to long-term debts, and most are zero-coupon bonds, meaning that before maturity, the principal does not need to be repaid, which also reduces MicroStrategy's default risk.
In terms of stock issuance, since the launch of the Bitcoin strategy, MicroStrategy has announced five stock issuances, raising up to $4.4 billion.
Source: Bloomberg
Will MicroStrategy be liquidated if the price of Bitcoin falls?
On November 21, the well-known short-selling firm Citron stated: 'Although Citron remains optimistic about Bitcoin, we have hedged by shorting MSTR. We have great respect for Saylor, but even he must know that MSTR is overheated.'
So is Citron's concern justified?
The design model of the asset flywheel inevitably reminds people of Luna/UST, which also relied on two assets stepping on each other to make prices soar rapidly. It also raises concerns: if the price of one of the assets falls, will it lead to a cascading liquidation effect?
However, MicroStrategy's model is very different from Luna:
Low debt ratio: Currently, MicroStrategy's market capitalization is about $75 billion, with bonds at $4.25 billion, and overall liabilities account for a low proportion of the company's financial structure, with maturity between 2027 and 2032.
No willingness to sell Bitcoin: Noted KOL @TheFlowHorse recently stated that if Michael Saylor sells Bitcoin, it would be the best trade ever. Michael Saylor replied that he would not sell Bitcoin.
Such commitments also ensure that MicroStrategy's 'premium stock issuance' strategy can continue.
Premium returns to 2021 levels: As shown in the chart below, MicroStrategy has maintained a premium status even during the 2022 bear market and has not dropped below it.
The current green line is rapidly rising, indicating a rebuilding of market confidence in MicroStrategy's Bitcoin strategy, returning to the levels seen during the 2021 bull market.
Source: CryptoQuant
If Bitcoin crashes, the likelihood of MicroStrategy being forced to sell, causing a cascading effect in both stocks and cryptocurrencies, is very low; the leverage is not as exaggerated as imagined.
Conclusion: The success of MicroStrategy has sparked a trend among Web 2 companies to accumulate BTC.
The success of MicroStrategy's Bitcoin reserve strategy has also led to imitation by other companies, including:
RUMBLE: A video sharing platform, announced the purchase of up to $20 million in Bitcoin as reserves.
Interactive Strength: A fitness equipment company, announced the purchase of $5 million in Bitcoin as reserves.
Hoth Therapeutics: A biopharmaceutical company, announced the purchase of $1 million in Bitcoin as reserves.
There are countless other examples; more and more companies (small-cap stocks) want to follow MicroStrategy's successful model of Bitcoin reserves, but most are short-term gimmicks; firstly, part of the strategy's success is capital-intensive, and secondly, small companies using this strategy often face investor skepticism and regulatory scrutiny.
But in any case, Bitcoin will be the biggest winner.
