Author: 0xjs, Jinse Finance
Bitcoin breaks through $80,000! Bitcoin breaks through $90,000! Bitcoin breaks through $95,000! Bitcoin breaks through $99,000!
Obviously, Bitcoin is bound to soon break through the $100,000 mark.
Common sense tells us that the direct reason for a sharp price increase is that someone is buying in large quantities with real money, after all, 'Money Talks'.
In this round of the crypto bull market, there is severe differentiation among crypto tokens, with the two most outstanding sectors being Bitcoin and Solana. Solana's rise mainly comes from the influx of crypto players into memes, while Bitcoin's rise is primarily driven by buying funds from the US Bitcoin ETF and some publicly listed companies, especially MicroStrategy. This article mainly focuses on MicroStrategy.
Jinse Finance reporters spent an evening on November 21 reviewing documents submitted by MicroStrategy to the SEC since 2021, deeply analyzing MicroStrategy's behavior and funding sources for buying Bitcoin. The conclusion is that MicroStrategy is an enhanced version of 'Grayscale + Luna'.
First, let's look at the overall situation of MicroStrategy, then break down the funding sources for MicroStrategy's Bitcoin purchases, and finally compare Grayscale and Luna. Below.
MicroStrategy does not fear bull or bear: it has spent over $16 billion to firmly buy Bitcoin.
Since implementing its Bitcoin reserve strategy in September 2020, MicroStrategy has steadfastly executed its Bitcoin reserve strategy across cycles without fear of bull or bear markets, such as buying Bitcoin for over $59,000 in April and November of the 2021 bull market.
MicroStrategy continually buys BTC
According to statistics from Jinse Finance reporters, as of November 22, 2024, MicroStrategy has spent a total of $16.58 billion to buy Bitcoin and currently holds 331,000 BTC, with the value of its Bitcoin holdings nearing $33 billion.
Since the successful issuance of the Bitcoin ETF in January 2024, the Bitcoin ETF has managed over 1.24 million BTC, with a total asset value exceeding $120 billion and a total net inflow of about $30.3 billion. The Bitcoin ETF is an investment target for many investors, not just from a single investor.
In sight, MicroStrategy may be the single entity that has spent the most on buying Bitcoin.
So the question arises, where does the substantial funding for MicroStrategy's Bitcoin purchases come from?
Jinse Finance reporters reviewed the reports submitted by MicroStrategy to the SEC, and its funding mainly comes from two sources: convertible senior notes and market price stock offerings.
Among them, the convertible senior notes are aimed at qualified institutional investors, while the market price stock issuance directly targets the secondary market.
Convertible Senior Notes: $7.26 billion qualified institutional investors
Below are the notes issued by MicroStrategy since 2020, except for the $500 million senior secured debt issued in June 2021, all of which are convertible senior notes.
On November 21, 2024, the newly issued $3 billion convertible bonds by MicroStrategy could be used at any time to buy Bitcoin. Perhaps in the recent one or two days, when MicroStrategy uses this $3 billion to buy Bitcoin, it will coincide with Bitcoin breaking the $100,000 mark.
Understanding what convertible senior notes are, you will find that they are indeed a good financial instrument.
Convertible senior notes are a special type of debt security that includes an option to convert the notes into a predetermined number of the issuer's shares. If the stock rises, it can be converted into shares; if the stock price is low, it will be repaid on the debt basis. Moreover, senior convertible notes have priority over all other debt securities issued by the same organization and can receive priority compensation. Therefore, it is a bond with high yield on top and a bottom guarantee.
Importantly, convertible senior notes generally come with a forced redemption clause. After the prohibited redemption period specified in the terms has passed or triggered the early redemption clause, the issuer can initiate forced redemption. Before the specified redemption date, investors need to convert the convertible bonds into the company's stock; otherwise, the issuer has the right to forcibly redeem the convertible bonds at the bond face value plus accrued interest. In most cases, investors will actively convert to stocks.
Taking the 2025 Convertible Notes, which MicroStrategy has already redeemed, as an example, the maturity date for the 2025 Convertible Notes is December 15, 2025. However, MicroStrategy announced on June 13, 2024, that holders of the 2025 Convertible Notes could choose to convert their notes into 2.5126 shares of MicroStrategy Class A common stock per $1,000 principal at the applicable conversion rate (reflecting a conversion price of $397.99 per share) before 5:00 PM New York time on July 11, 2024. Otherwise, MicroStrategy will forcibly redeem all outstanding notes on July 15 at a redemption price equal to the principal plus accrued unpaid interest.
On the same day, MicroStrategy's stock price was around $1,300 (MicroStrategy completed a 1:10 stock split on August 8, with the $1,300 price being the pre-split price), clearly, creditors would choose to convert their debts into stocks. After obtaining the stocks, creditors complete the arbitrage.
Why are institutional investors eager to buy MicroStrategy's convertible bonds? Because the risk is extremely low, essentially ensuring profit, and the senior convertible bonds have priority claim rights. Currently, MicroStrategy's total convertible bond liabilities amount to $7.26 billion, and the market value of Bitcoin held by MicroStrategy is nearly $33 billion. Even if Bitcoin drops 75%, creditors of MicroStrategy's convertible bonds will not lose money.
It can be said that the most important motivation behind convertible bonds is that the issuer lets investors actively choose to convert their debt into stock, thereby allowing the issuer to avoid having to pay cash to repay the debt.
Market Price Stock Issuance: Nearly $10 billion secondary market
Below is the market stock issuance data of MicroStrategy since 2020. Over the past four years, MicroStrategy has raised a total of $9.8235 billion directly in the secondary market by issuing new shares, and all these funds have been used by MicroStrategy to buy Bitcoin.
The so-called market price stock issuance (ATM Equity Offering) refers to the subsequent issuance of stocks by a listed company after its IPO to raise funds. In an ATM issuance, the listed company sells newly issued stocks to the secondary trading market gradually over a period at the current market price through designated brokers. Brokers sell the issuing company's stocks in the open market to obtain cash revenue, which is then delivered to the issuing company.
Taking MicroStrategy's ATM Equity Offering as an example, on August 1, 2024, MicroStrategy signed a sales agreement with TD Securities (USA), The Benchmark Company, BTIG, Canaccord Genuity, Maxim Group, and SG Americas Securities brokers ('August 2023 Sales Agreement'). According to this agreement, MicroStrategy may issue and sell its Class A common stock through sales agents from time to time, with a maximum issuance of $2 billion in stock. According to the 8-K document provided by MicroStrategy to the SEC on November 11, 2024, MicroStrategy issued a total of 7,854,647 shares and raised a total of $2.03 billion, all of which were used to purchase 27,200 BTC.
On October 30, 2024, MicroStrategy announced its 21/21 plan, stating that it will raise $42 billion in capital over the next year, including $21 billion in equity and $21 billion in fixed-income securities, for investment in Bitcoin. On the same day, MicroStrategy disclosed that it reached a sales agreement with TD Securities (USA), Barclays Capital, The Benchmark Company, BTIG, LLC, Canaccord Genuity, Cantor Fitzgerald & Co., Maxim Group, Mizuho Securities USA, and SG Americas Securities to issue $21 billion of MicroStrategy stock at market price. The 8-K document submitted by MicroStrategy to the SEC on November 18, 2024, shows that from November 11 to 17, MicroStrategy sold 13.594 million shares and raised about $4.6 billion, all of which were used to buy 51,780 BTC.
According to MicroStrategy's plan, brokers still have about $16.4 billion of newly issued MicroStrategy shares available for sale.
Why is MicroStrategy considered an enhanced version of 'Grayscale + Luna'?
Now that we are familiar with MicroStrategy's 'convertible bonds' and 'market price stock issuance', let's recall whether they resemble Grayscale and Luna from the last bull market, and it is an enhanced version.
Grayscale Vs. Convertible Bonds:
Looking back at Grayscale's operating mechanism before it was converted into an ETF, Grayscale trust shares were only issued to qualified investors. Investors purchased GBTC shares using over-the-counter cash (the underlying assets of the Grayscale trust must be corresponding Bitcoin) or exchanged physical bitcoins for GBTC shares, locking in for 6 months before publicly trading to complete arbitrage. Meanwhile, GBTC shares and the underlying Bitcoin assets are isolated, and investors cannot redeem them.
MicroStrategy's convertible senior notes are also aimed at qualified investors, where investors buy convertible bonds using over-the-counter cash and convert them into MicroStrategy stock during forced redemption to complete arbitrage. The convertible senior notes are also isolated from MicroStrategy's Bitcoin.
During the Bitcoin bull market of 2020 and 2021, the premium of GBTC attracted a large amount of arbitrage funds, and GBTC once accumulated over 650,000 BTC, which many industry insiders referred to as the 'clear bull market'.
In this bull market, MicroStrategy has attracted over $7 billion from qualified institutional investors through convertible bonds, and MicroStrategy's 21/21 plan is preparing to issue more bonds.
In contrast, MicroStrategy's convertible bonds have a long maturity date, with the nearest maturity being in 2027, enough to last until the next cycle. If necessary, MicroStrategy can completely force the redemption of convertible bonds, allowing investors to convert them into nearly zero-cost newly issued MicroStrategy stock without MicroStrategy actually needing to repay the money. Even if it waits until the maturity date for redemption, MicroStrategy can issue new convertible bonds to replace old ones, just as MicroStrategy redeemed the 2028 Secured Notes with cash from the 2024 Convertible Notes issued on September 20, 2024. Clearly, MicroStrategy's convertible bonds are more robust.
Luna Vs. Market Price Stock Issuance:
In the case of Luna, burning 1 dollar of LUNA can mint 1 dollar of algorithmic stablecoin UST. As long as the LUNA price rises, more UST can be minted, and with more UST, more bitcoins can be purchased as reserves, stabilizing 1 UST = 1 USDT. Luna directly faces ordinary investors without permission.
MicroStrategy's market price stock issuance is quite similar and also directly targets ordinary investors in the secondary market. The higher the stock price of MicroStrategy, the more US dollars it can obtain through market price stock issuance, and the more US dollars can be used to buy more bitcoins. 'Left foot stepping on the right foot' rising all the way. After the Bitcoin ETF is approved in January 2024, establishing a bull market, MicroStrategy's net asset premium (market price per share / corresponding Bitcoin value - 1) will climb to 2.7. Currently, MicroStrategy holds a total of 331,200 BTC, valued at approximately $32.84 billion, while MicroStrategy's total market capitalization once exceeded $100 billion.
Luna and UST can be minted both ways. If UST depegs, arbitrageurs can buy UST at a discount to mint LUNA at 1 UST = 1 USDT, forming a 'death spiral' that causes the collapse of LUNA. In fact, if the Luna Foundation LFG had bought Bitcoin much earlier and more during the upward cycle (it only bought $1.5 billion worth of Bitcoin), and if UST could temporarily mint LUNA in one direction, Luna might not have collapsed.
MicroStrategy goes a step further; MicroStrategy's market price stock issuance is one-way and will not fall into a death spiral, and is almost at zero cost. MicroStrategy is clearly safer than Luna. Even during the bear market of 2022, MicroStrategy's net asset premium was at least 60%.
Source: mstr-tracker
As long as someone is willing to buy MicroStrategy stocks issued at market price, the more bitcoins MicroStrategy buys during its high NAV premium period, the thicker MicroStrategy's safety cushion becomes. When pushed to the extreme, MicroStrategy's market value is completely equal to its Bitcoin value, and MicroStrategy itself bears no risk because the risk has been transferred to stock investors.
In summary, can we fully say that MicroStrategy is an enhanced version of 'Grayscale + Luna'?
Conclusion: Triple Maximism
At the Bitcoin conference held at the end of July 2024 in Nashville, MicroStrategy CEO Michael Saylor delivered a keynote speech titled 'Bitcoin Revolution'.
After four years of practice, he proposed a methodology for individuals, companies, institutions, and countries to respond to the Bitcoin revolution, which he referred to as the triple maximism strategy. For companies, it means buying Bitcoin through three avenues—cash flow, issuing stocks when the stock price is overvalued, and issuing debt when interest rates are low.
He said so and did so.
MicroStrategy has hoarded 331,200 BTC.
