Author: 0xCousin, IOBC Capital
There has never been a shortage of legendary stories in the history of Wall Street, but the strategic transformation of MicroStrategy’s Bitcoin Treasury Company 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. Countries adopted loose monetary policies to stimulate the economy, resulting in increased currency depreciation and inflation risks.
Michael Saylor re-evaluated the value of Bitcoin during the COVID-19 pandemic. He believes that when the money supply grows at a rate of 15% per year, people need a safe-haven asset that is not linked to legal cash flow. Therefore, he chose the Bitcoin strategy for MicroStrategy.
Compared with BTC ETFs or other Spot Bitcoin ETPs launched by BlackRock and other companies, MicroStrategy's Bitcoin strategy is more radical. It purchases Bitcoin through the company's idle funds, convertible bonds, additional shares and other financing methods. The company itself obtains potential benefits from the rise of Bitcoin and bears the potential risk of Bitcoin's decline. ETFs/ETPs focus more on price tracking.
MicroStrategy’s funding sources and Bitcoin purchasing history
MicroStrategy raises funds to purchase Bitcoin mainly through four channels.
1. Purchase with own funds
For the first three investments, MicroStrategy used idle funds on its books to purchase. In August 2020, MicroStrategy spent $250 million to purchase 21,400 bitcoins; in September, it invested $175 million to purchase 16,796 bitcoins; and in December, it invested $50 million to purchase 2,574 bitcoins.
2. Issuance of Convertible Senior Notes
In order to purchase more Bitcoin, MicroStrategy began to issue convertible bonds to raise funds for purchasing coins.
Convertible preferred bonds are financial instruments that allow investors to convert bonds into company stock under certain conditions. This type of bond is characterized by a low interest rate, even zero, and a conversion price that is higher than the current stock price. Investors are willing to buy such bonds mainly because they provide downside protection (i.e., the principal and interest can be recovered when the bond matures) and potential gains when the stock price rises. The interest rates of several convertible bonds issued by MicroStrategy are mostly between 0% and 0.75%, indicating that investors are actually confident in the rise of MSTR's stock price and hope to earn more income by converting bonds into stocks.
3. Issuance of Senior Secured Notes
In addition to convertible senior bonds, MicroStrategy also issued $489 million of senior secured bonds with an interest rate of 6.125% and due in 2028.
Senior secured bonds are secured bonds with lower risk than convertible senior bonds, but they only have fixed interest income. MicroStrategy has chosen to repay the senior secured bonds in advance.
4. At-the-Market Equity Offerings
As MicroStrategy's Bitcoin strategy has begun to bear fruit, MSTR's stock price has continued to rise, and MicroStrategy has adopted more market-priced stock issuances to raise funds. Funds obtained in this way have lower risks because it is not debt, there is no repayment pressure, and there is no foreseeable repayment date.
MicroStrategy has entered into open market sales agreements with agency structures such as Jefferies, Cowen and Company LLC and BTIG LLC. Pursuant to these agreements, MicroStrategy may issue and sell Class A common stock through these agencies from time to time. This is known in the industry as ATM.
The issuance of market-priced stocks is more flexible, and MicroStrategy can choose the time to sell new shares based on the secondary market conditions. Since the issuance of stocks dilutes the equity of existing shareholders, the correlation with the price of Bitcoin and the increase in the amount of coins per share of MSTR have led to a complex market reaction to this move, and the overall volatility of MSTR's stock price has been high.
MicroStrategy’s process of purchasing Bitcoin through the above four methods is as follows:
Produced by: IOBC Capital
Corresponding to the BTC price chart, MicroStrategy’s specific purchase history is as follows:
Source: bitcointreasuries.net
As of December 30, 2024, MicroStrategy has invested a total of approximately US$27.7 billion and purchased 444,262 bitcoins at an average price of US$62,257 per bitcoin.
Several key issues about MicroStrategy's "Smart Leverage" to buy Bitcoin
There is much controversy in the market about MicroStrategy's "Intelligent Leverage" strategy of purchasing Bitcoin.
Regarding several key issues that are hotly debated in the market, I would like to share my thoughts:
1. Is the leverage risk of MSTR high?
Let me first tell you the conclusion, it’s not too high.
According to the information disclosed by MSTR in the Q3 2024 earnings conference call, MSTR's total assets were approximately $8.344 billion at the time, because the carrying value of Bitcoin in this financial report was only $6.85 billion (there were only 252,220 bitcoins at the time, calculated at a price of $27,160). The total debt was approximately $4.57 billion, so the corresponding debt-to-equity ratio was 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 calculated based on the latest market price of Bitcoin on September 30, 2024 (US$63,560), the actual market value of Bitcoin held by MSTR is US$16.03 billion, and the corresponding MSTR debt-equity ratio is 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 are $7,273.85 million, as follows:
Produced by: IOBC Capital
As of December 30, 2024, MicroStrategy holds 444,262 bitcoins, worth $42.25 billion. Assuming that the assets of other parts of MicroStrategy remain unchanged (i.e., $1.49 billion), then MSTR's total assets are $43.74 billion and its liabilities are $7.27385 billion, then MSTR's debt-to-equity ratio is only 0.208.
Let’s take a look at the debt-to-equity ratios of the top U.S. listed companies – Alphabet 0.05, Titter 0.7, Meta 0.1, The Goldman Sachs Group 2.5, and 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 will these convertible bonds become an unbearable burden in the future?
Let me first talk about the conclusion. If MicroStrategy does not continue to issue convertible bonds, then the value of the 444,262 Bitcoins held by MicroStrategy will be lower than the total convertible bonds of $7.27 billion if Bitcoin falls below $16,364 for a long time. If MicroStrategy only uses ATM financing and idle funds to buy Bitcoin, as the number of MicroStrategy Bitcoin holdings increases, the "insolvency" price line can become even lower.
If MicroStrategy continues to issue convertible bonds crazily to purchase Bitcoin when Bitcoin is at a high price, and Bitcoin enters a bear market, the decline in Bitcoin prices will cause the value of Bitcoin held by MicroStrategy to be lower than the total amount of its convertible bonds, which will also cause MSTR's stock price to fall, thereby affecting its refinancing and debt repayment capabilities, and then making the convertible bonds become an unbearable burden.
MicroStrategy's convertible bonds give bondholders the right to convert their bonds into MSTR shares, and there are two stages: 1. Initial stage - if the trading price of the bond falls by >2%, the creditor can exercise the right to convert the bond into MSTR shares and sell it back to get the principal back; if the trading price of the bond is normal or even rises, the creditor can resell the bond in the secondary market at any time to get the principal back. 2. Late stage - when the bond is about to mature, the 2% rule no longer applies, and the bondholder can take the cash back and leave, or directly convert the bond into MSTR shares.
Since the convertible bonds issued by MicroStrategy are all low-interest or even zero-interest bonds, it is obvious that creditors actually want the conversion premium. If the MSTR stock price has a certain increase compared to the price at the time of initial financing on the repayment date, then the creditors are more likely to consider debt-to-equity conversion. If the MSTR stock price has a certain decline compared to the price at the time of initial financing, then the creditors will consider asking for the principal and interest.
If the creditor does not choose to convert to MSTR stock, MicroStrategy will have several options if it needs to repay the creditor:
Continue to issue new shares and obtain capital repayment;
Continue to issue new bonds to repay old debts; (this has already been done in September 2024)
Sell some of your Bitcoin to repay the loan.
Therefore, at present, it is unlikely that MicroStrategy will fall into a "debt-ridden" situation.
3. Why do investors start to care about the amount of currency per share of MSTR?
Let me first talk about the conclusion. The amount of currency per share will determine the net asset value per share of MSTR.
Whether issuing convertible bonds or ATMs, financing is achieved by diluting equity. The purpose of financing is to increase Bitcoin reserves. For MSTR shareholders, diluting equity is a negative, and traditionally speaking, it is not a good thing. The story that MicroStrategy's management told MSTR shareholders was - BTC Yield KPI.
Essentially, as long as the market value of MSTR is higher than the total value of the BTC it holds, that is, there is a market value premium rate, then diluting MSTR's equity to buy BTC can increase the amount of money in each MSTR share. The increase in the amount of money in MSTR means that the net asset value per share of MSTR is growing, so for shareholders, diluting equity to raise funds to buy Bitcoin is still a worthwhile thing to do.
Currently, MicroStrategy holds 444,262 BTC, with a total holding value of approximately $42.256 billion. With the current market value of MSTR at $80.37 billion, MSTR's market value is 1.902 times the value of its Bitcoin holdings, which means the current premium rate is 90.2%. The current total share capital of MSTR is 244 million shares, and the corresponding BTC holding per share is approximately 0.0018.
This is the core of the so-called “smart leverage”, which converts the difference between the market value of one’s own enterprise and the market value of Bitcoin holdings into a capital operation advantage.
4. Why has MicroStrategy bought Bitcoin more aggressively in the past two months?
Let me start with the conclusion. It may be because MSTR’s stock price is very high.
MicroStrategy has significantly increased the scale of its financing to buy bitcoins in the past two months. In November and December 2024, MicroStrategy invested a total of $17.69 billion (63.8% of the total investment) through ATMs and convertible bonds, and purchased 192,042 bitcoins (43.2% of the total purchases). Only $3 billion of these were convertible bonds, and the remaining $14.69 billion were financed through ATMs.
Overall, the entire process of MicroStrategy's strategic allocation of Bitcoin has the characteristics of fixed investment in terms of time dimension; but in terms of quantity and amount, it seems that buying in a bull market is more aggressive than in a bear market.
I can't understand this feature, and I can only guess that it may be because MSTR's stock price rose more in the bull market. In August 2024, MSTR's stock price rose 3 times after the high dividend and transfer, and the stock price rose more than 4 times throughout the year, while Bitcoin's increase this year was only 2.2 times.
MicroStrategy’s CEO talked about a beautiful “42B plan” in the Q3 2024 earnings conference call.
British writer Douglas Adams said in "The Hitchhiker's Guide to the Galaxy" that the supercomputer "Deep Thought" gave the result of 42 for "the ultimate answer to the questions of life, the universe and everything".
MicroStrategy believes this is a magic number, so it proposed a 42B financing plan. 21 is also a magic number, and the maximum total amount of Bitcoin is 21M. Therefore, MicroStrategy plans to issue 21B ATM + 21B Fixed Income in the next three years to continue to increase its holdings of Bitcoin.
Assuming that MicroStrategy eventually raises $42 billion through additional share issuance, and assuming that the additional share issuance is at a share price of $330, the total share capital after the additional issuance will become 371.3 million shares. Assuming that MicroStrategy buys Bitcoin at an average price of 10wU, the company can increase 420,000 Bitcoins, bringing MicroStrategy's total holdings to 864,262 Bitcoins. At that time, the coin content per share will increase to 0.00233, an increase of about 29.4%. At this time, MSTR's total market value is $122.53 billion, and the total value of BTC held is 86.4 billion. In this case, the market value premium rate still exists.
5. After MicroStrategy, what other driving force does Bitcoin have for its rise?
Let me first say the conclusion. Apart from the listed companies that purchased Bitcoin under the influence of MicroStrategy, the only thing we can think of at the moment is more national strategic reserves, but we don’t have too high expectations in this bull market.
The rise of Bitcoin in this cycle is mainly due to the following major buying forces:
1. Long Term Holders with Strong Consensus on Bitcoin
There is no need for a reason for the long-term rise of Bitcoin. To BTCers, this is as natural as monkeys climbing trees and mice digging holes, because it is digital gold.
After Bitcoin fell below $16,000, the most mainstream Antminer S17 full series of mining machines were near the shutdown price, and the Shenma M30S, Hippo H2, Antminer T19 and other mining machines have also fallen into the shutdown price range. In this price range, even if nothing happens, this rebound will happen. The bull-bear transition is like a basketball falling freely from a high altitude. After hitting the ground, there will be multiple rebounds that weaken in sequence.
Source: glassnode
As can be seen from the above figure, at the end of 2022, Long Term Holders continued to increase their positions.
After more than ten years of development, the consensus on Bitcoin has become strong enough, and on-site existing investors and Long Term Holders have reached a consensus on the shutdown price of the mainstream mining machines.
2. ETFs bring incremental funds to traditional financial markets
Since the approval of BTC ETF, the total net inflow has been 528,600 BTC. In this bull market, ETF has brought nearly 36B incremental buying orders to Bitcoin and 2.6B incremental buying orders to ETH.
Source: coinglass.com
In addition, the approval of BTC ETF (and ETH ETF) will also have a driving effect, with more traditional financial institutions beginning to pay attention to and deploy in the Crypto field.
3. MicroStrategy continues to buy, and many listed companies follow suit, Davis doubles
According to Bitcointreasuries data, as of December 30, 2024, 149 entities hold a total of more than 2.95 million bitcoins. And this data is still growing rapidly in the near future.
Source: bitcointreauries.net
Among these entities holding Bitcoin, 73 are listed companies, 18 are private companies, 11 are countries, 42 are ETFs or Funds, and 5 are DeFi protocols.
MicroStrategy is the first listed company to adopt the "Bitcoin Treasury Company" strategy, but it is not the only one. Marathon Digital Holdings, Riot Platforms, Boyaa Interactive International Limited and other listed companies have also implemented this strategy. However, MicroStrategy still has the greatest impact.
4. National strategic reserves
Currently, some governments already hold Bitcoin. The details are as follows:
Source: bitcointreasuries.net
Although these countries hold Bitcoin, most of the Bitcoin is seized by law enforcement agencies during the law enforcement process. They just haven't sold it yet and are not stable holders.
Among these countries, perhaps only El Salvador is a real BTC Holder. El Salvador started buying Bitcoin in 2021, buying 1 Bitcoin a day. So far, it has held 6,002 BTC with a market value of over $560 million.
In addition, Bhutan also holds 11,688 BTC through Bitcoin mining. However, Bhutan is not a BTC Holder and has reduced its holdings in the past two months.
During his campaign, US President Trump said that if he was elected president, he would establish a strategic reserve of Bitcoin.
If there is any greater driving force for the rise of Bitcoin after MicroStrategy, the first choice is to promote the US government's strategic reserve of Bitcoin after Trump takes office, and then drive more countries to strategically reserve Bitcoin.
Summarize
MicroStrategy's Bitcoin strategy is not only a business experiment of enterprise transformation, but also a major innovation in financial history. Through sophisticated capital operation, intelligent leverage, and deep insight into the value of Bitcoin, it has not only won a brilliant growth in market value for itself, but also pushed Bitcoin deeper into the vision of traditional finance, breaking the barriers between crypto assets and mainstream capital markets.
This bold attempt by MicroStrategy may be just the prelude to the Bitcoin legend, or just a small and dispensable step in the real rise of Bitcoin, but it may be a big step in the new era of finance.
