Written by: AY FundInsight
In 2023, MicroStrategy's story in the financial market resembles a maze exploration of capital, full of adventure and ambitious calculations. Its market value skyrocketed from $1.8 billion at the beginning of the year to the current $111 billion, with the underlying driving forces and logical connections being thought-provoking. As a company that centers on Bitcoin as a core strategy, MicroStrategy's actions not only serve as a bridge between traditional financial means and the cryptocurrency market but also have far-reaching implications for the future of the web3 industry. Aiying FundInsight will delve into MicroStrategy's strategic logic in Bitcoin driving, capital leverage, and governance reform, as well as the insights this provides for the entire web3 financial ecosystem.
1. Bitcoin Driven: From Marginal Asset to Core Strategy
MicroStrategy's growth path is undoubtedly inseparable from its aggressive positioning in Bitcoin. At the beginning of 2023, the company's market value was far below its Bitcoin holdings, but through large-scale financing and a series of high-risk capital operations, its market value has now reached 3.55 times its Bitcoin holdings, equivalent to 5.9% of Bitcoin's market value.
Michael Saylor views Bitcoin as digital gold that transcends traditional currency, and based on this, he has constructed the core logic for the company's growth. In the context of web3, MicroStrategy represents a new type of enterprise that uses digital assets as its underlying support, attempting to leverage Bitcoin's long-term appreciation expectations to stimulate traditional capital markets' confidence in the future. With the rise in Bitcoin prices, MicroStrategy's market value has also soared, and the capital markets have shown great trust in its Bitcoin-driven premium.
However, the market's attitude towards this 'digital gold standard' strategy is not entirely uniform. While some investors are confident in MicroStrategy's future, with some believing its market value could surpass that of Bitcoin itself, this notion is not accepted by all rational investors. The decentralized spirit of web3 and the volatility of Bitcoin render such speculation fraught with uncertainty, after all, market confidence is not static.
2. Leveraged Capital Operations: The Innovative Combination of Dilution and Zero-Coupon Bonds
MicroStrategy's success lies not only in its choice of Bitcoin as a cutting-edge asset but also in how it cleverly utilizes traditional capital market tools to gain unprecedented capital leverage in innovative ways.
1. Equity Dilution: The Strategy of Value Dilution
Aiying FundInsight observes that MicroStrategy's financing methods mainly fall into two categories: equity dilution and zero-coupon bonds.
(1) The Process and Logic of Equity Dilution
MicroStrategy raises funds by issuing additional shares, with almost all proceeds used to purchase Bitcoin.
This practice creates a unique 'value dilution' logic: although the company dilutes the rights of existing shareholders, the expected appreciation of Bitcoin leads the market to interpret this dilution as an increase in asset value, thereby driving the company's stock price upward.
Binding Shareholder Interests: After each stock issuance, the company immediately invests the funds into purchasing Bitcoin. This immediate reinvestment closely links shareholder interests with the long-term appreciation of Bitcoin. This transmission effect in the financial market continuously enhances investors' confidence in the company's future. Many investors even view this as a way to indirectly hold Bitcoin and are willing to pay an additional premium for this asset allocation model.
2. Zero-Coupon Convertible Bonds: The Game of Capital Returns
(1) The Strategy of Issuing Zero-Coupon Convertible Bonds:
Another financing method for MicroStrategy is through zero-coupon bonds. In a recent round of financing, MicroStrategy expanded the bond size from $175 million to $2.6 billion, with a zero coupon rate.
Returns Depend on Stock Price Growth: The holders of these bonds do not receive traditional interest income, but instead tie their returns closely to the future growth of MSTR's stock price. They can be converted into MicroStrategy's common stock at a future point in time, meaning that investors' ultimate returns depend entirely on the increase in MicroStrategy's stock price, somewhat akin to employee stock options, which are directly related to the value of the Bitcoin held by the company.
(2) High-Risk Gambling by Investors:
Investors bear the high-risk gamble. They choose to forgo regular interest earnings in exchange for faith in MicroStrategy's future growth—especially its close connection to Bitcoin.
The Nature of Long-Term Call Options: These bonds essentially function as a type of long-term call option, allowing investors to profit only when MicroStrategy's stock price rises significantly. The potential source of these returns primarily depends on the price movements of Bitcoin and the market's confidence in MicroStrategy's governance capabilities.
(3) The Chain Reaction of Capital Markets:
This financing method is not just a capital investment; it is more like a gamble with the future market. The resulting game triggers a massive chain reaction, with every link driving overall growth, full of a delicate balance between high risk and high returns.
The Synergistic Effect with Equity Dilution: MicroStrategy's bond financing strategy complements its equity dilution, forming a unique capital operation model. This model resonates in the financial market, continuously driving funds into the company as market confidence in its future is bolstered, with the core of this game being a firm belief in Bitcoin and an optimistic outlook on the future of the digital asset world.
3. Governance Reform: From Saylor's Control to Institutional Governance
While expanding capital, MicroStrategy's governance structure has also undergone significant changes. Michael Saylor's absolute control over voting rights has diminished, marking the company's transition from a 'controlled company' to a more market-oriented and institutional governance model.
In the past, Saylor had the final say in company decisions through control of Class B common shares, and MicroStrategy was thus classified as a 'controlled company' by NASDAQ. However, with the large issuance of Class A common shares, the voting advantage of Class B shares has been diluted, and Saylor's voting power has fallen below 50%. The company has therefore been forced to establish an independent nomination committee, and board decision-making has begun to shift toward a more collective direction. This change not only means that the company needs to respond more transparently to market oversight but may also introduce more uncertainty into its future strategic decisions.
In the web3 ecosystem, the transformation of governance structures often signifies a company's transition from the initial radical growth phase to a more stable and sustainable development period. The case of MicroStrategy reflects the typical characteristics of this transformation: rapid expansion under individual leadership and gradual standardization under institutional governance. For the web3 industry, which pursues decentralization, this transition is also an inevitable trend of internal checks and balances.
4. Deep Thoughts on Aiying FundInsight
MicroStrategy's capital operation path has sparked deep reflections from Aiying FundInsight. Can such a strategy be sustained, or how will it change the entire web3 financial ecosystem? Under Michael Saylor's leadership, MicroStrategy has almost recklessly pushed Bitcoin to the center of traditional capital markets. Through the combination of equity dilution and zero-coupon bonds, the company boldly strikes out in the capital market, fully betting on the long-term value of Bitcoin. But is this model a reckless gamble or a forward-looking insight into future asset patterns?
From a deeper perspective, MicroStrategy has transformed itself into a structured tool for indirectly holding Bitcoin by leveraging the faith of shareholders and bondholders in Bitcoin. It relies not only on the market's perception of Bitcoin but also opens a new avenue in the financial realm by connecting traditional financing tools with digital assets. However, such a path is fraught with risks and uncertainties, especially in the face of significant fluctuations in Bitcoin prices, where the leverage risk faced by MicroStrategy will be sharply amplified.
What is even more thought-provoking is the demonstration effect of this capital operation method on the overall web3 industry. Many companies may be inspired to emulate MicroStrategy by structuring their holdings and financing around crypto assets as the main assets. However, in the absence of hedging mechanisms and diversified risk management, such strategies could likely lead to systemic market risks. While MicroStrategy's debt and equity dilution methods may seem successful, the logic behind them is built on the premise of continuous Bitcoin price increases. Once this premise is shaken, the entire foundation of financing and growth will also be impacted.
Aiying FundInsight believes that the case of MicroStrategy represents both a profound experiment in new capital operations and a high-risk market gamble. It demonstrates how web3 companies utilize traditional financial markets to expand their digital asset holdings while also revealing the significant risks inherent in this strategy. If the market ecology for crypto assets can continue to optimize in the future, MicroStrategy may become a pioneer of a new corporate model; however, if market sentiment reverses, such high-leverage operations could become a significant risk hotspot. Aiying FundInsight will analyze MicroStrategy's debt structure and potential risks in the next issue, please stay tuned.
