With its main business in business intelligence (BI) software performing mediocre, MicroStrategy's side business of investing in bitcoin has thrived, making it undoubtedly one of the big winners of this bull market. Due to the strong momentum of bitcoin, MicroStrategy achieved huge profits and skyrocketed its stock price after boldly betting on bitcoin; this winning strategy is attracting more and more companies to follow suit, attempting to replicate its success.
However, while MicroStrategy achieves capital appreciation through bitcoin's super strong returns, the high premium of its stock has also raised market concerns, with well-known short-seller firm Citron publicly stating their short position. Can MicroStrategy's leveraged game continue to play out?
The value of bitcoin holdings exceeds $32.6 billion, and the stock price has surged 497% this year.
Since adopting a bitcoin investment strategy in 2020, MicroStrategy has become a veritable whale, and its bitcoin reserves now exceed the cash and securities held by companies like IBM and Nike.
According to data from BitcoinTreasuries.com, as of November 22, MicroStrategy purchased over 331,000 bitcoins at an average price of approximately $49,874, accounting for nearly 1.6% of the total bitcoin supply, with a current value exceeding $32.69 billion. If calculated at the current bitcoin price of about $99,000, MicroStrategy has achieved an unrealized profit of approximately $16.2 billion over the past four years.
Despite achieving substantial returns, MicroStrategy has not stopped increasing its bitcoin positions, and its infinite money-printing approach is based on purchasing bitcoins through issuing stocks and convertible bonds. According to MicroStrategy's latest announcement, the company has completed the issuance of $3 billion in zero-coupon convertible senior bonds, which will mature in 2029, with a conversion price at a 55% premium to the market price, approximately $672 per share. This issuance netted about $2.97 billion, and MicroStrategy plans to use most of the funds to purchase more bitcoins and for other operational purposes. Furthermore, from the $21 billion raised previously through stock financing, there are still $15.3 billion available for purchasing bitcoins, and it plans to raise $42 billion for bitcoin investments over the next three years.
According to the latest data shared by @thepfund, since November 18, the list of MicroStrategy's main bondholders (who have the option to convert bonds into stocks) shows that Vanguard Group ranks first, BlackRock is second, and several well-known financial institutions and investment companies such as Goldman Sachs, JPMorgan Chase, and Deutsche Bank also appear on the list.
The strengthening of bitcoin yields has driven positive sentiment in the market towards MicroStrategy's prospects. Data shows that MicroStrategy's market capitalization has reached $80.506 billion, nearly 2.5 times the premium over the value of its bitcoin holdings, once ranking among the top 100 U.S. listed companies by market capitalization. In terms of stock price performance, MSTR has climbed to $397.28, about 14 times the stock price at which the company first purchased bitcoins, having risen 497.8% this year, far exceeding the increase in bitcoin during the same period. Of course, MSTR's trading is also very active, with Tradingview tracking the most active U.S. stocks in the Top 100 data showing that MSTR's trading volume yesterday (U.S. time) reached $39.9 billion, second only to Nvidia's $58.8 billion.
MicroStrategy shareholders have also experienced significant appreciation effects. According to MicroStrategy founder Michael Saylor's recent revelations on social media, MSTR's financial operations achieved a 41.8% return from bitcoin, providing its shareholders with a net profit of approximately 79,130 BTC. This equates to about 246 BTC per day, with no costs, energy consumption, or capital expenditures typically associated with bitcoin mining. According to Fintel's tracking of the Q3 13F filings, the number of institutional holders of MSTR has increased to 1,040, totaling 102 million shares (currently valued at $40.52 billion), with shareholders including Capital International, Vanguard Group, Citadel, Jane Street, Morgan Stanley, Haina International Group, and BlackRock.
In this regard, CoinDesk analyst James Van Straten once pointed out that MicroStrategy's shareholders are a unique group; usually, dilution of shareholder equity is considered a bad thing, but shareholders of MicroStrategy seem very pleased that their equity is being diluted because they know MicroStrategy is buying bitcoins. This strategy effectively increases the value per share, which means the value for shareholders also increases.
High stock price premium sparks controversy, sustainability of leveraged strategy becomes the focus.
Faced with the high premium of MicroStrategy stock, the market has begun to show differences regarding its underlying leveraged strategy.
Optimists believe that MicroStrategy has successfully leveraged bitcoin's upside potential with the performance of its company stock, creating a vast space for value growth, especially in the context of strong bitcoin price increases. For example, Mechanism Capital partner Andrew Kang stated on the X platform that MicroStrategy is being pushed up by bitcoin, with the premium rate constantly hitting new highs, traditional finance is unable to comprehend it, and there is a certain degree of sluggishness towards MicroStrategy's model; BTIG analyst Andrew Harte praised MicroStrategy's plan, believing that the company's management has done an excellent job in using volatility to raise additional statutory capital to buy bitcoins, and has significantly raised the target price for MicroStrategy from $290 to $570.
'According to recent statistics, the average cost of MicroStrategy's bitcoins is $49,874, meaning it is now close to an unrealized profit of 100%, which is a super thick safety cushion. MicroStrategy is borrowing off-exchange leverage, with no liquidation mechanism at all. Angry creditors can at most convert their bonds into MSTR stock at a specified time and then angrily dump them into the market. Even if MSTR drops to zero, it still does not need to be forced to sell these bitcoins, as the earliest debt that MicroStrategy borrowed must be repaid by February 2027. Moreover, due to MicroStrategy's convertible bonds, creditors are largely guaranteed to profit, hence the interest rate is relatively low,' stated 0xTodd, a partner at Nothing Research.
In the view of dForce founder Yang Mindao, MicroStrategy is not just about triple arbitrage of stocks, bonds, and coins; the key is turning MSTR stock into a real bitcoin in traditional finance, a feat of 'borrowing false to repair true'. As for when the flywheel will stop turning and when the music will stop, it hinges on how long the high premium of stock and single stock net coins can be maintained. If market trends break expectations, and the supply of bitcoin derivatives increases, the stock/coin premium of MicroStrategy could shrink to below 1.2, making such financing difficult to sustain. He also pointed out that MicroStrategy currently has a bitcoin premium of 300%, and participants in the secondary market face extreme risks if they do not understand the variables involved. The constantly growing size means the premium will only shrink, not expand; sustained financing capability is one of the variables that can transform the premium from virtual to real.
However, bears argue that MicroStrategy's current stock price premium has far exceeded the value of bitcoin itself and may quickly narrow or even amplify the downside risk of the stock price as market sentiment fluctuates.
For example, Citron believes that as bitcoin investment becomes easier than ever (currently possible to buy ETF, COIN, and HOOD, etc.), MSTR's trading volume has completely detached from the fundamentals of bitcoin. Although Citron remains optimistic about bitcoin, it has hedged by opening short positions in MSTR. Even Michael Saylor must know that MSTR is now overheated.
Steno Research pointed out in a recent report that 'the effect of MicroStrategy's recent stock split is gradually diminishing, which further reinforces the belief that its premium is unlikely to be sustained. The premium relative to its bitcoin reserves recently skyrocketed to nearly 300%, indicating that the company's valuation 'has a significant discrepancy with the direct calculation of its assets and business fundamentals'. As regulatory bodies show increasing favor toward bitcoin and cryptocurrencies, investors may choose to hold bitcoins directly rather than MicroStrategy stock.
BitMEX Research believes that MicroStrategy's price performance and rising model is a 'Ponzi scheme', which is unreasonable. The stock price has a huge premium compared to the value of its held bitcoins, partly because some financial regulators prohibit people from buying bitcoin ETFs, but investors are very eager for bitcoin exposure, so they buy MSTR despite the premium, while MSTR has a 'yield strategy' in place.
